Monetary Operations Framework at the Bank of Thailand

1 October 2015

2

Outline

• Bank of Thailand monetary policy and operation framework

1. Reserve requirement

2. Open market operations (OMOs)

3. Standing facilities • Impact of spillovers on Thailand and policy responses

3

Outline

• Bank of Thailand monetary policy and operation framework

1. Reserve requirement

2. Open market operations (OMOs)

3. Standing facilities • Impact of spillovers on Thailand and policy responses

4

Flexible Inflation Targeting in Thailand

Framework

Strategy Implementation

Ultimate target

Intermediate target

Operational target

Instruments

Price stability

Sustainable growth

Expected inflation

(Headline inflation of 2.5% +/- 1.5%

annually average)

Policy interest rate

(1-day RP rate)

• Reserve requirement

• Open Market Operations

• Standing facilities

(+/- 50 bps.)

5

Various monetary instruments are used to steer short-term interest rates as well as

serve the objective of promoting developments of financial markets.

Required and Excess reserves

Autonomous Factors

Standing Facilities

Open Market Operations

Demand for Reserves Supply of Reserves

Statutory requirements for some types of FIs to hold a specified part of their portfolio in reserve money

1. Reserve requirement Instruments

The purchase or sale of financial instruments by either in primary or secondary market. Bilateral repurchase (BRP) Issuance of BOT bonds/bills Outright purchase/sale of government

securities Foreign exchange swap

2. Open Market Operations

The lending or borrowing of liquidity of high-quality financial assets at penalty rates.

3. Standing Facilities

BOT monetary operations

6

Criteria Types of Liquid Asset

Remaining (including (a) (b) and (c)) no less

than 6%

Unencumbered eligible public securities and term deposits at BOT such as government bonds, BOT bonds,

MOF-guaranteed state-enterprise bonds

(c) No more than 2.5%

Vault cash

(b) No more than 0.2%

Cash at the central cash centers of commercial

banks

(a) No less than 0.8%

Current Account Deposits at BOT (C/A)

1%

6%

No less than 1%

1. Reserve requirement

• Commercial banks are required to maintain a liquid asset ratio of 6% of deposits base

(including non-resident Baht deposits, net foreign borrowing with maturity less than 1 year, bill of exchange and promissory notes)

• Comprising

A minimum of 1% as deposits at the Bank of Thailand (reserves, CAB)

A maximum of 2.5% in vault cash

The rest as eligible securities (government bonds, BOT bonds, MOF-guaranteed state-enterprise bonds)

• Maintenance period: fortnightly, lag 1 period

• Non remunerated (CAB portion)

• Allow averaging

• Allow carry backward/forward 5% of requirement

“Reserve requirement is currently used for liquidity management, rather than for monetary policy signaling purpose. RR helps stabilize the demand for reserve money which benefits the daily liquidity forecasting and management.”

8

1. Bilateral repurchase (BRP)

2. Issuance of BOT bonds/bills

3. Foreign exchange swap

4. Outright purchase/sale of government securities

2. Open Market Operations

“The BOT Bonds are still the main

absorption instrument”

Outstanding of BOT’s Monetary instruments

9

0

1

2

3

4

5

6

7

8

9

10

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

TlnTHB

Foreign

Corporate

BOT

SOE

Government

Coordination with the MOF

• Both MOF and BOT are major debt securities issuers in Thailand.

• The BOT coordinates closely with the PDMO: types, maturity, issue size, auction schedule, etc.

• Eligible bidders: – are the same for both govt bonds and

BOT bonds – include many groups of institution

investors • Both MOF and BOT try to design issuance

schedule with market development objective in mind as well • Auction frequency • Consolidation of issues

Domestic Bond outstanding by Issuers

10

The interest rate corridor effectively set boundaries for short-term market rates and thus help contain short-term interest rates volatility.

Feature Deposit Facility Lending Facility

Operating Time

16.30 – 17.00 17.00 – 17.30

Interest rate Policy rate

– 0.5% Policy rate

+ 0.5%

Collateral N/A Bonds issued or guaranteed by government

Tenor Overnight Overnight

Counterparties Financial institutions with current

accounts at the BOT and have applied for membership

3. Standing Facilities

Policy rate

Deposit Facility

Lending Facility

50 bps

Inte

rest

rate

Time

Interest rate corridor

11

Summary: Open Market Operations & Standing Facilities

Instruments Counterparty Frequency Operational time Tenors Methods Open Market Operations

- BOT Bond Eligible bidder 2 – 3 times/wk 9.15 - 9.30 14D/3M/6M/

1Y/2Y/3Y Multiple-price Auction

-BRP BRP PDs Daily Regular: 9.30 - 9.45 MPC: 14.30 - 14.45 FTO: 16.00 - 16.15

1D/7D/ 14D/1M

1D: Fixed-rate Tender (at Policy rate)

>1D: Variable-rate Tender (spread over policy rate)

- Bond Outright e-Outright CPTs As required 10.00 - 11.00 - Multiple-price Auction

- e-Swap (Buy/Sell Swap) Eligible

commercial banks Daily 11.30 - 13.30

1D/7D/14D/1M/ 3M/6M/9M/12M

Multiple-price Auction

- Sell/Buy Swap As required 8.30 - 16.30 < 1 ปี OTC

Standing Facilities - Deposit Facility FIs with C/A

At BOT Daily 16.30 - 17.00 O/N Policy rate-50 bps

- Lending Facility Daily 17.00 - 17.30 O/N Policy rate+50 bps - O/N ILF Facility BAHTNET members Daily End of day O/N Policy rate+50 bps

8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00

BOT Bond BRP

Outright e-Swap BRP (MPC) BRP (FTO)

DF LF

12

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Jan-

08

Mar-0

8 Ap

r-08

Jun-

08

Aug-

08

Oct-0

8 De

c-08

Fe

b-09

Ap

r-09

Jun-

09

Aug-

09

Oct-0

9 De

c-09

Fe

b-10

Ap

r-10

Jun-

10

Aug-

10

Oct-1

0 No

v-10

Ja

n-11

Ma

r-11

May-

11

Jul-1

1 Se

p-11

No

v-11

Ja

n-12

Ma

r-12

May-

12

Jul-1

2 Se

p-12

No

v-12

Ja

n-13

Ma

r-13

May-

13

Jun-

13

Aug-

13

Oct-1

3 De

c-13

Fe

b-14

Ap

r-14

Jun-

14

Aug-

14

Oct-1

4 De

c-14

Fe

b-15

Ap

r-15

Jun-

15

Aug-

15

% Policy rate O/N Interbank O/N Private Repo 1M Bill 1M BIBOR

Money market rates

So far, the current framework has served its functions well. Short-term money market rates have been stable and moved in line with the policy rate.

Source: BOT

13

Outline

• Bank of Thailand monetary policy and operation framework

1. Reserve requirement

2. Open market operations (OMOs)

3. Standing facilities • Impact of spillovers on Thailand and policy responses

14

27.0

28.5

30.0

31.5

33.0

34.5

36.0

37.5 -5

0

5

10

15

20

25

30

Dec-

08

Jul-0

9

Feb-

10

Sep-

10

Apr-1

1

Nov-

11

Jun-

12

Jan-

13

Aug-

13

Mar-1

4

Oct-1

4

May-

15

Bond Equity THB Bln USD

QE2 QE3

THB/USD

The extraordinarily low interest rates in advanced economies has caused substantial porfolio inflows into

Thai bond and equity markets

Change in foreign holding in bond and equity since Dec 2008

Source: BOT, Reuters

QE1

15

Foreign investors mainly invest in long-term government bonds, while the foreign demand for short-term bills depends heavily on

exchange rate expectation. Foreign Holdings of government and BOT Bonds

Source: BOT

Change in Foreign Short-term Bond Holding and Exchange Rate

24.5

26.0

27.5

29.0

30.5

32.0

33.5

35.0

36.5

-80

-60

-40

-20

0

20

40

60

80

Feb-

09

Aug-

09

Feb-

10

Aug-

10

Feb-

11

Aug-

11

Feb-

12

Aug-

12

Feb-

13

Aug-

13

Feb-

14

Aug-

14

Feb-

15

Change in NR Bond Holding (<=1Y)

USDTHB (RHS)

Bln THB USDTHB

16

Source: BOT

Higher foreign demands for government bonds have put pressure on long-term bond yields. However, short-term yields

has mainly been driven by market expectation on the policy rate.

Change in Foreign Bond Holding and Thai Government Bond Yields

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-80

-60

-40

-20

0

20

40

60

80

Mar-0

9 Ju

l-09

Nov-

09

Mar-1

0 Ju

l-10

Nov-

10

Mar-1

1 Ju

l-11

Nov-

11

Mar-1

2 Ju

l-12

Nov-

12

Mar-1

3 Ju

l-13

Nov-

13

Mar-1

4 Ju

l-14

Nov-

14

Mar-1

5 Ju

l-15

% BlnTHB >1YR (LHS) 5Y 10Y TH Policy Rate 10Y UST

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-80

-60

-40

-20

0

20

40

60

80

Mar-0

9 Ju

l-09

Nov-

09

Mar-1

0 Ju

l-10

Nov-

10

Mar-1

1 Ju

l-11

Nov-

11

Mar-1

2 Ju

l-12

Nov-

12

Mar-1

3 Ju

l-13

Nov-

13

Mar-1

4 Ju

l-14

Nov-

14

Mar-1

5 Ju

l-15

% BlnTHB <=1YR (LHS) 6M

3M TH Policy Rate

17

Foreign inflows have boosted the Thailand’s stock index. However, this was partially offset by domestic factors.

SET Index and P/E Ratio

5

10

15

20

25

30

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Dec-

08

Apr-0

9

Aug-

09

Dec-

09

Apr-1

0

Aug-

10

Dec-

10

Apr-1

1

Aug-

11

Dec-

11

Apr-1

2

Aug-

12

Dec-

12

Apr-1

3

Aug-

13

Dec-

13

Apr-1

4

Aug-

14

Dec-

14

Times Index SET Index P/E Ratio (RHS)

QE1 QE2 QE3 Tapering

Source: The Stock Exchange of Thailand (SET)

18

The spillovers from QE-related actions has been clearly witnessed by the movement of Thai Baht and its volatilities.

0%

2%

3%

5%

6%

8%

9%

11%

12%

Jan-

07

Jun-

07

Nov-

07

Apr-0

8 Se

p-08

Fe

b-09

Ju

l-09

Dec-

09

May-

10

Oct-1

0 Ma

r-11

Aug-

11

Jan-

12

Jun-

12

Nov-

12

Apr-1

3 Se

p-13

Fe

b-14

Ju

l-14

Dec-

14

May-

15

28

29

30

31

32

33

34

35

36

37

Jan-

07

Jun-

07

Nov-

07

Apr-0

8 Se

p-08

Fe

b-09

Ju

l-09

Dec-

09

May-

10

Oct-1

0 Ma

r-11

Aug-

11

Jan-

12

Jun-

12

Nov-

12

Apr-1

3 Se

p-13

Fe

b-14

Ju

l-14

Dec-

14

May-

15

USDTHB

Movement in THB against USD THB Volatility

QE1 QE2 QE3 QE1 QE2 QE3

Source: BOT

“Taper talk”

Source: BOT

19 Source: NESDB, BOT

The BOT has taken more active role in curbing excessive THB volatility to ensure that the QE spillovers would not have

great impact on the real economy.

International Reserves

0

50

100

150

200

250

Jan-

03

Jul-0

3 Ja

n-04

Ju

l-04

Jan-

05

Jul-0

5 Ja

n-06

Ju

l-06

Jan-

07

Jul-0

7 Ja

n-08

Ju

l-08

Jan-

09

Jul-0

9 Ja

n-10

Ju

l-10

Jan-

11

Jul-1

1 Ja

n-12

Ju

l-12

Jan-

13

Jul-1

3 Ja

n-14

Ju

l-14

Jan-

15

Jul-1

5

Bln USD

Net reserves

Gross reserves

Contribution to Real GDP International Reserves Contribution to Real GDP

20

Similar to other EM central banks, the BOT has accumulated reserves and the currency mismatch on its own balance sheet.

Foreign assets

Domestic assets Monetary

Base

Equities

Non-monterary liabilites (OMOs)

Assets Liabilities and Equities

21

BOT has adjusted its monetary operations by changing allocation of monetary instruments.

Proportion of Monetary Instruments as of 31 July 2015

Proportion of Monetary Instruments as of 31 July 2012

Source: BOT Note: The 4-year BOT bond was no longer issued.

2013 - present: Shortened maturity profile as a result of a tighter market condition, a shift in investors’ demand, and high uncertainties in global financial markets.

Before 2012: Lengthened maturity profile in order to cope with a rapid build-up in need for sterilization.

22

Total Absorption Outstanding and Average Maturities

To enhance flexibility in its liquidity management framework, the BOT has shortened maturity profile of the monetary instruments.

Source: BOT

0

100

200

300

400

500

0

1,000

2,000

3,000

4,000

5,000

6,000

Dec-

08

Jun-

09

Dec-

09

Jun-

10

Dec-

10

Jun-

11

Dec-

11

Jun-

12

Dec-

12

Jun-

13

Dec-

13

Jun-

14

Dec-

14

Jun-

15

BlnTHB Total Absorption Outstanding Remaining Maturity (RHS) Original Maturity (RHS) Days