A longer time horizon can contribute to clarifying monetary policy considerations and thereby enable us to better explain the way we work. If, for example, we see that inflation is slightly above two per cent at the end of the forecast horizon, our policy rule says that we should raise the repo rate to hold back demand and thereby inflation. However, if demand nevertheless falls and inflation beyond the forecast horizon is below the two per cent level, the conclusion is not so obvious. Then it may be time to discuss lowering the interest rate. Extending the forecast horizon may in some situations explain why increased flexibility is needed in monetary policy. These are some reflections on the time aspect and the monetary policy operational framework. However, there are also other important factors indicating that the inflation target and the policy rule must be interpreted with a measure of flexibility. It is easy to have a blind faith in monetary policy’s scope for economic fine tuning, but we should be sceptical of this for at least two reasons. One is that our forecasts and other reports on which the interest rate decisions are based contain a large measure of uncertainty, because of gaps in statistics, information lags regarding economic trends, incomplete knowledge of how companies and households will react and structural changes, such as increased globalisation. Reactions to monetary policy may also vary considerably over time, partly, but not completely, due to economic activity.
Prasarn Trairatvorakul: Global challenges, global solutions – IMFC issues Statement by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the International Monetary and Financial Committee (IMFC) Twenty-Third Meeting, International Monetary Fund, Washington DC, 16 April 2011. * * * On behalf of Brunei Darussalam, Cambodia, Fiji, Indonesia, Lao P.D.R., Malaysia, Myanmar, Nepal, Philippines, Singapore, Thailand, Tonga and Vietnam. Introduction 1. We thank Mr. Youssef Boutros-Ghali for his contributions to the IMFC, especially his leadership in completing the 2010 Quota and Governance reform. We congratulate Minister Tharman Shanmugaratnam on his appointment as the new Chairman. With his rich experience in understanding the interests of advanced and emerging market countries, we have full confidence that Minister Tharman will be able to make significant progress in fostering a global consensus on many challenging policy issues. 2. Although the global recovery has gained strength since the last IMFC meeting, its prospect remains fragile as several downside risks continue to prevail. Having been successful in coordinating policies to contain the catastrophic damage from the global financial crisis, policymakers are now facing a more difficult task in forging a consensus on multilateral commitments for countries to take into account the impact of their policies on other members and the international monetary system (IMS). Such an agreement will not be easy to reach against the current backdrop of a multi-speed recovery and asymmetry in domestic policy requirements.