Rebuilding credibility through inflation targeting

In the aftermath of the 1997 devaluation, the Bank of Thailand concluded that the inconsistency between its old pegged exchange rate, its monetary policy, and its openness to capital flows had itself been a cause of the crisis, since defending a fixed rate while allowing free capital movement left little room to also control domestic credit growth. The BOT moved first to a monetary-targeting framework from mid-1997, using growth in the money supply as its guide, before adopting full inflation targeting in May 2000, with the 14-day repurchase rate as its new policy instrument and core inflation kept within an explicit target band. That framework proved durable: core inflation stayed within its 0 to 3.5% band for most of the following decade, giving the BOT a credible anchor it had previously lacked and allowing a managed float of the baht that let the exchange rate absorb shocks instead of forcing a crisis. The Bank of Thailand's own retrospective material on what it calls the Tom Yum Kung crisis treats this shift to inflation targeting as the central institutional lesson of 1997.