Foreign Exchange Policy and Intervention in Thailand
Paper prepared for the BIS Deputy Governors’ meeting on “Forex Intervention:
Motives, Techniques and Implications in Emerging Markets”, BIS, Switzerland, 2-3
December 2004.
I. Introduction
This paper summarizes information on how Thailand “managed” its foreign exchange
rate policy after the float. A special emphasis is given to intervention motives and
techniques. It also outlines some foreign exchange measures used in deterring
speculative flows.
Since 2 July 1997, Thailand has adopted the managed-float exchange rate regime,
replacing the basket-peg regime which had been in operation since 1984. The value of
the Baht has since then been largely determined by market force. The Bank of
Thailand ‘manages’ the exchange rate by intervening in the foreign exchange market
from time to time in order to prevent excessive volatilities in the markets, while
fundamental trends are accommodated. In other words, movements in the exchange
rates which are in line with the changes in economic fundamental and financial
development would only be smoothened and not resisted.
The managed-float exchange rate regime together with the Inflation Targeting
framework, which was formally introduced in May 2000, with short-term interest
rates as the operating target has worked well for Thailand. The inflation target
performs the role of a new nominal anchor for monetary policy while flexibility in
exchange rates helps absorb shocks to the economy.
Since the adoption of the managed-float exchange rate regime, the Thai Baht has
generally moved in line with the economic fundamental. However, extreme exchange
rate movements have occasionally occurred due to various causes. As a result,
different combinations of techniques and tactics were used depending on the market
conditions. Broadly speaking, the Bank of Thailand focuses on containing excessive
and persistent exchange rate volatility and intervenes when exchange rates
movements appear to be inconsistent with fundamental changes. Short-term volatility
is not a major concern unless it continues to persist and become a threat to stability.
The rest of this paper is organized as follows. The next two sections briefly describe
recent developments in the FX market and an institutional setup as background
information. Section IV then explains why the Bank of Thailand intervenes in the FX
market while section V elaborates how the FX policy is carried out. The last section
on information disclosure describes our view on transparency issue.
II. Developments in the FX Market after the Float
Since the float, exchange rates have generally moved in line with economic
fundamentals. Figure 1 shows how the Baht has moved against the US dollar after the
float. The Baht/US dollar exchange rate fluctuated widely from 36-56 Baht/US dollar.
However, in the past few years, the exchange rate was relatively stable as reflected in
2
the considerably lower volatilities1. In effective terms, however, the NEER and
REER, shown in Figure 2, were relatively stable as most regional currencies had
generally moved in tandem.
Figure 1: THB/USD Exchange Rate and Volatility
Figure 2:
http://www.bot.or.th/Thai/FinancialMarkets/operations/DocLib_FX/Foreign%20Exchange%20Policy%20and%20Intervention%20in%20Thailand.pdf
