These changing global dynamics, interacting with market’s reactions to potential US rate hike, may cause volatile ups and downs of financial markets. BIS central bankers’ speeches  1  I will not discuss these at length. Rather, at this juncture, the key question is how to design or adjust policy frameworks to cope better with these financial spillovers while preserving monetary policy independence. Undoubtedly, there is no single recipe that fits all central banks. Thus the aim of my talk is to offer a central bank’s overall perspectives and Thailand’s experiences on policy framework in managing capital flow and exchange rate stability. I will also touch on some beneficial policy cooperation among regional countries. A brief background of Thailand’s monetary policy framework Let’s begin with a broad perspective of Thailand’s monetary policy framework. The Bank of Thailand (BOT) has been conducting monetary policy under “Flexible Inflation Targeting” framework since May 2000. As a pragmatic response to the failure of a pegged exchange rate system, transparency of the policy making process under IT was deemed appropriate for Thailand, particularly after the 1997 Asian Financial Crisis. Under this regime, price stability is the overriding and explicit objective, while economic growth and financial stability are also taken into policy deliberation. The policy interest rate is our main tool in achieving the mandate. With managed-float exchange rate regime, the Thai baht is generally allowed to be determined by the market.
In addition, active and widespread use of foreign currency hedging instruments is also beneficial to mitigate the negative knock-on effects from exchange rate volatility. Liberalization of outward investment by domestic investors also helps promote more balanced capital inflows and alleviate upward pressure on the exchange rate. These international asset holdings can provide a buffer when domestic market faces rigorous tests of volatility. Nevertheless, liberalization needs to be well planned, timed, and sequenced in order to ensure that its benefits outweigh costs. The appropriate degree of liberalization for a country at a given time depends on its specific circumstances, notably its financial and institutional development. More stable and long-term flows, particularly direct investment flows, should be liberalized prior to short-term portfolio flows, which are more volatile and sensitive to cyclical factors. In October 2012, the BOT launched the Capital Account Liberalization Master Plan. This was part and parcel of our longer-term plan to facilitate Thai companies to diversify their investments abroad, especially in neighboring countries. This would encourage private companies to operate their businesses more efficiently by expanding their markets and production bases. In turn, such diversification will help strengthen their competitiveness and absorptive capacity. At the other end of the spectrum, limiting leverage in the banking system would add more cushions to the economy against external shocks. Last but not least, developing fundamental economic strengths to enhance countries’ resiliency to external shocks can work through well-diversified export items focusing on high value-added products.