Pakorn Malakul na Ayudhya: Central bank independence - what does it mean? The Bank of Thailand’s experience Remarks by Mr Pakorn Malakul na Ayudhya, Deputy Governor of the Bank of Thailand, on the occasion of The Inauguration of the Monetary Policy Committee, Bank of Ghana, Accra, 10 September 2002. *  *  *  Mr. Chairman, Governors, Members of the MPC, Distinguished guests, Ladies and Gentlemen, I consider it a great honour to be invited by the Bank of Ghana to take part in this very important event, the inauguration of the MPC. I would also like to thank Governor Paul Acquah and the Bank of Ghana for the warm hospitality extended to me and my staffs. It has certainly made our first visit to Ghana a very memorable one. Before I begin my talk on the assigned topic of Central Bank Independence: What Does It Mean? The Bank of Thailand's Experience, I would like to offer my congratulations. The first one is for Governor Paul Acquah and the Bank of Ghana for the successful launching of the MPC. The ceremony which took place yesterday was very impressive. The message came across very clearly that the Government places great importance upon the Bank of Ghana's independence and that much reliance is placed on the MPC for its successful conduct of monetary policy so that price stability and consequently sustainable growth can be achieved. The exact words used by your Finance Minister were essential pillar for macroeconomic stability.
It also has advantage over the rate of shorter maturities, such as 1-day or 7-day, in that it will not impose too much burden on the Bank of Thailand in taking care of the liquidity and maintaining the policy rate. Therefore, other repurchase rates such as 1-day or 7-day will be freely determined by market forces. In sum, the 14-day RP rate will leave room for the short-term rate with flexibility to adjust and move in line with money market liquidity conditions. The policy rate was initially set at 1.5 percent per annum and it was raised to 2.5 percent in June 2001 to realign the money market interest rates. Following the global economic slowdown, the policy rate had been cut twice in December 2001 and January 2002 to help stimulate the economy. The rate now stands at 2 percent per annum. Having the policy rate clearly announced, the Bank of Thailand is able to provide a transparent monetary policy signal to the market. This helps provide a framework for a more effective transmission mechanism. After the adjustment in the policy rate, other rates in the repurchase market will adjust in line with the policy rate. Banks will thereafter adjust their portfolio and change their rates for loans and deposits. The transmission mechanism will work itself out such that this will eventually lead to the desirable result in the real sector. The policy impact usually takes up to 8 quarters in the transmission process.