Inflation Targeting in Asia

Transcription

1 Inflation Targeting in Asia Takatoshi Ito Professor of International and Public Affairs, Columbia University December 2015

2 Summary Four emerging market economies have adopted Inflation Targeting in Asia. Korea Thailand Indonesia The Philippines Four IT frameworks are converging Headline CPI Target (mid-) point, 2.5% - 4% Medium-term target Hitting targets Excellent in Thailand and Korea Much improved in the Philippines and Indonesia All missing targets in the last two years Changing from inflation risk to deflation risk (except Indonesia) (c) Takatoshi Ito 2015/12/15 2

3 Thailand (c) Takatoshi Ito 2015/12/15 3

4 Korea (c) Takatoshi Ito 2015/12/15 4

5 Philippines (c) Takatoshi Ito 2015/12/15 5

6 Indonesia (c) Takatoshi Ito 2015/12/15 6

7 Current Framework Thailand Korea Indonesia Philippines As of November/December 2015 Targeting CPI headline headline headline headline Target point/range 2.5 plus/minus % 4 plus/minus plus+minus 1 Actural inflation rate -0.97(Nov.2015) 1.0(Nov.2015) 4.89 (Nov.2015) 1.1(Nov.2015) "hitting record" before % 49% 21% 11% "hitting record" after % 37% 47% 68% Inflation target rate decided by BOK and Gov't MPC members 3 internal + 4 external 2 internal + 5 external All internal 9 Number of MPC meetings (per year) 8 times Inflation report -> Transparency Monetary Policy Report (quarterly) Individual voting record disclosure no no governor's term 5 years 4 years 5 years (c) Takatoshi Ito 2015/12/15 7

8 Questions on FIT [Evaluation] [Headline or Core] [Point or Range] [Relationship to Marco Pru] [Relationship to the exchange rate regime] (c) Takatoshi Ito 2015/12/15 8

9 Reasons for IT Asian ITers Korea, 1998 Thailand, 2000 Indonesia, 2000 (frequent changes of the range) The Philippines, 2002 (frequent changes of the range) IT is attractive and popular More countries adopt IT No country exited from IT Political independence is attractive; mandate for price stability is affirmed Crisis was the turning point for Thailand, Indonesia and the Philippings Pre-crisis de facto fixed exchange rate Post-crisis needed some anchor for price stability (c) Takatoshi Ito 2015/12/15 9

10 Monetary Policy 1. Why have many Asian countries adopted inflation targeting after the crisis? Which countries? Thailand, Indonesia, Korea, the Philippines Why? Without fixed exchange rate (post-crisis world), domestic target (anchor) was needed Are they successful? Thailand, Korea success in terms of staying in the target range, most of the time. Philippines and Indonesia, not really 2. What are the major benefits of adopting inflation targeting in theory and practices? Theory. Manage expectation, so that the price-wage spiral can be blocked. Practice? Other inflation targeters? NZRB, RBA, BoE, BoC, Riksbank, and most recently FRB, BOJ (c) Takatoshi Ito 2015/12/15 10

11 Inflation targeting (in general) Announcing numerical target of an inflation rate for the medium run Which inflation rate (headline or core)? Central point or a range? Not every month, but as an average over some time period Better understood as inflation forecast targeting But flexible inflation targeting cares about the output level too Independence (from the government) in deciding monetary policy instruments, i.e. policy interest rate But, transparency, accountability, and reporting to the government and the public Inflation Report Testimony in the parliament (Congress) Speeches (c) Takatoshi Ito 2015/12/15 11

12 Inflation targeting in Asia: 2015 Thailand (May 2000) Indonesia (May 1999 Jan 2000) Korea (Dec 1998) The Philippines (Jan 2002) (c) Takatoshi Ito 2015/12/15 12

13 Bank of Thailand (1) The inflation targeting framework was adopted by the Bank of Thailand (BoT) in 2000, Major motivation: to restore the credibility of the Bank after the Asian Crisis of The Bank of Thailand adopted what is known as Flexible Inflation Targeting (FIT). This framework implies not only a commitment to the specific numerical target range of inflation but also takes account of economic growth. Institutional norms covers the decision-making process in the central bank, and its relationship and communication with the government and the public. The central bank has independence, with monetary policy decided by a Monetary Policy Committee including external members, (c) Takatoshi Ito 2015/12/15 13

14 Bank of Thailand (2) Focused on forecasts of the path of the economy over the next year or two. This independence is balanced by strong governance obligations covering the central bank s transparency, accountability and reporting both to the government and to the public at large. Over time this transparency has become greater among FIT central banks. BOT follows the best practice. (c) Takatoshi Ito 2015/12/15 14

15 Inflation target from May 2000 to Dec ) The use of core inflation as the policy target 2) Setting the core inflation target at between per cent 3) Use of quarterly average core inflation as the target Inflation target in 2009 (1) Retain the use of quarterly target for the continuity of policy conduct. (2) Narrow the target range from per cent per annum to per cent per annum. Inflation target in 2015 (1) Change the inflation measure from core to headline (2) 2.5% plus minus 1.5%. On 6 January 2015, the Cabinet approved annual average headline inflation of 2.5 ± 1.5 percent as the monetary policy target for It will be effective after publication in the Royal Gazette. (c) Takatoshi Ito 2015/12/15 15

16 Thailand (c) Takatoshi Ito 2015/12/15 16

17 Korea Inflation measure Headline Core Headline Ranges have been adjusted several times Currently, 2.5% - 3.5%, rather narrow one Actual has been below the target since 2013 (c) Takatoshi Ito 2015/12/15 17

18 year target ranges based on Period(s) Mid-term inflation target ±1% CPI annual ±1% CPI ±1% Core Inflation, which strips out the prices of petroleum fractions and agricultural products except cereals from the Consumer Price Index (CPI) ±1% Core Inflation 2.5% ±1% Core Inflation annual inflation target 2.5% ±1% Core Inflation annual inflation target 2.5% ~3.5% Core Inflation 2004~ ~3.5% Core Inflation ~3.5% Core Inflation medium-term inflation target ±0.5% CPI 2007~ ±0.5% CPI ±0.5% CPI ± 1% CPI 2010~ ±1% CPI ±1% CPI % CPI % CPI % CPI medium-term inflation target medium-term inflation target medium-term inflation target a level of 2.5 % (c) Takatoshi Ito 2015/12/15 18

19 Korea (c) Takatoshi Ito 2015/12/15 19

20 year Actual Inflation (in %) 1 Inflation Target (in %) 2 Actual vs. Target Philippines Developments/Factors affecting inflation Lower Slowdown in food inflation and subdued demand-pull inflationary pressures Lower Absence of significant demand-driven pressures with the continued soft spots in overall demand, soft labor market conditions, and moderate capacity utilization in industries such as manufacturing Easing cost-push inflationary pressures with the abatement of the El Niño phenomenon and the downtrend in international oil prices Higher Supply-side shocks including the increase in global oil prices (which led to higher domestic pump prices of petroleum products and hikes in transport fares) as well as the spate of typhoons and domestic supply constraints affecting the availability of certain food products Higher meat prices linked to the recurrence of avian flu in other countries Higher Continued rise in consumer prices particularly those for food, energy, and transportation Global increase in oil prices leading to higher domestic pump prices, adjustments in minimum wage throughout the country, as well as hikes in the transport fares and utility charges Adverse effect of El Niño dry weather on agricultural output, especially on rice and corn production Higher Higher world oil prices, the two-percentage point increase in the VAT, and the removal of certain VAT exemptions in 2005 itinerary Lower Generally stable prices for major food items, favorable supply conditions, particularly the sustained growth in agriculture, and the subsiding base effect of the RVAT on CPI Firm peso tempering the impact on domestic prices of increasing global commodity prices, including food and oil, which rose during the latter part of the year ±1 Higher Confluence of global and supply-side factors beyond the direct control of the BSP such as the big surge in the international prices of oil and food commodities, resulting in higher domestic rice and pump prices of fuel Supply shocks over a longer period, which contributed to second-round effects, affected wage and pricesetting behavior of businesses and households; inflation expectations also rose ±1 Within Slowdown in inflationary pressures during the early until the middle part of the year owing to lower oil and other commodity prices due, in large part, to subdued demand conditions (c) Takatoshi Ito 2015/12/15 20

21 Philippines (c) Takatoshi Ito 2015/12/15 21

22 Indonesia (c) Takatoshi Ito 2015/12/15 22

23 How to avoid severe spillovers from advanced countries? US monetary easing capital inflows to EM US monetary tightening capital outflows from EM EM s fundamentals and policy can be ignored Capital outflows can become self-fulfilling A small change in portfolio of large hedge funds can be relatively large for a small open economy Outflows can occur suddenly If outflows cannot be managed properly, inflows should be controlled (c) Takatoshi Ito 2015/12/15 23

24 Has inflation targeting been successful in Asia? In hitting average, Thailand and Korea are doing better than Indonesia and the Philippines Although this is not direct proof, it is quite suggestive: Thailand and Korea success; and Indonesia and the Philippines, it is less success (c) Takatoshi Ito 2015/12/15 24

25 Inflation targeting and bubble Is inflation targeting putting too narrow an objective? Success in IT does not guarantee prevention of a bubble Japan in the second half of the 1980s US in Should monetary policy, i.e., the interest rate, be changed if the asset prices are rising or declining sharply (beyond the extent that they are included in the forecast of CPI inflation)? See Ito(2010) for the debate (c) Takatoshi Ito 2015/12/15 25

26 Macro Prudential policy 8.6. What kind of policy is needed to prevent asset bubble and burst, if not monetary policy? Macro prudential policy Interest rate hike Capital gains tax hike LTV ratio Regulation on bank credit increase Chilean tax (if capital inflows are the source) Will Tobin tax (transactions tax) work? (c) Takatoshi Ito 2015/12/15 26

27 Exchange Rates and prices 8.7. Do prices move the exchange rate? Or does the exchange rate move prices? The exchange rate moves faster than the prices What matters for export competitiveness is the real exchange rate Domestic inflation real depreciation or real appreciation? Did prices rise (inflation) after the currency crisis of ? (c) Takatoshi Ito 2015/12/15 27

28 Bank Indonesia Monetary Policy Objectives The goal of Bank Indonesia is to achieve and maintain the stability of the rupiah. This goal is stipulated in article 7 of Act No. 3 of 2004 concerning Bank Indonesia. Rupiah stability is defined, among others, as stability of prices for goods and services reflected in inflation. To achieve this goal, Bank Indonesia decided in 2005 to adopt the inflation targeting framework, in which inflation is the primary monetary policy objective, while adhering to the free floating exchange rate system. Exchange rate stability plays a crucial role in achieving price and financial system stability. For this reason, Bank Indonesia also operates an exchange rate policy designed to minimise excessive rate volatility, rather than to peg the exchange rate to a particular level. To carry this out, Bank Indonesia holds powers to conduct monetary policy through the establishment of monetary targets (such as money supply or interest rates) with the primary goal of keeping inflation at the government-prescribed level. On the operational level, these monetary objectives rely on the use of instruments, including open market operations on the rupiah and forex money markets, setting the discount rate, prescribing a minimum reserve requirement and regulating credit or financing. Inflation Target 2015: 4% (±1%) (c) Takatoshi Ito 2015/12/15 28

29 Notes on readings (*) Barro, Robert J. & Lee, Jong-Wha (ed.), Costs and Benefits of Economic Integration in Asia, Oxford University Press, March. Chapter 4, Andrew Rose, Understanding Business Cycle Synchronization: Is Inflation Targeting Paving the Way to Asian Monetary Union, pp What does it take to have OCA? And role of IT Business cycle synchronization (BCA), or evidence of macro/financial integration ground for monetary integration (OCA a la Mundell) Trade linkage BCA Inflation targeting and floating exchange rate (theory) less synchronization; (data) not really Why? A fewer large common shock Decline in output volatility, before 2008 No concrete evidence that inflation targeting is increasing/decreasing BCA Inconclusive whether IT contributed to OCA in Asia (c) Takatoshi Ito 2015/12/15 29

30 (*) Morgan, Peter J. (2013). Monetary Policy Frameworks in Asia: Experience, Lessons, and Issues, ADBI Working Paper Series, no. 435, September (31 pages) Sec 2. History. More CB adopted floating exchange rates and (implicit/explicit) inflation targeting after the Asian crisis Singapore managed the exchange rate as an intermediate target, a monetary policy framework that had been in place since the early 1980s. Singapore s high import rate and its role as a price-taker in international markets made the country highly susceptible to imported inflation. Thus, Singapore considers the exchange rate to be a more effective tool than the interest rate for stabilizing inflation. Its monetary policy framework, however, can be considered a variant of inflation targeting. Sec 3. (c) Takatoshi Ito 2015/12/15 30

31 Table 2: Institutional Frameworks for Monetary Policy in East Asia Economy Formal Policy Rate Formal Operating Target Targeting Arrangement PRC Reference to money growth targets 1-year deposit and loan reference rates Excess reserves Hong Kong, China Currency board: target range centered on HKD 7.8 = US$1 USD/HKD spot rate Indonesia Inflation targeting: inflation target for is 4.5±1%; for year-on-year CPI inflation BI rate (= target rate for 1-mo. SBI) 1-month SBI rate Japan Medium- to long-term price stability expressed in terms of year on year rate of change in the CPI (approximately between 0 and 2%). Uncollateralized O/N call rate target O/N call rate Republic of Korea Inflation targeting: target range of 3±1% in terms of annual headline CPI inflation ( ) O/N call rate target O/N call rate Malaysia Overnight policy rate Avg O/N interbank rate Philippines Inflation targeting: target range of 4±1% ( ) for the avg year-on-year change in the CPI over the calendar year. O/N repo and reverse repo rates No formal target Singapore As of mid-2012, modest appreciation of the undisclosed Singapore dollar NEER policy band Policy band for Singapore dollar NEER Singapore dollar NEER Taipei,China Intermediate target for M2 growth: 2.5% 6% Rediscount rate Rediscount rate Thailand Inflation targeting: target range of 0.5% 3% for quarterly average of core inflation. 1-day repo rate 1-day repo rate (c) Takatoshi Ito 2015/12/15 31