Headline rate may be new focus

Anoma Srisukkasem

The Nation

The Bank of Thailand is considering making headline inflation its policy target rather than just core inflation, so that its monetary measures can act on the real cost of living.

Governor Tarisa Watanagase said yesterday the central bank, however, was pursuing monetary policy by taking into account not only core inflation - the changes in prices of goods and services, excluding raw foods and energy - but also headline inflation.

The Bank of Thailand has conducted a study to change its inflation target in terms of the type or timing in a bid to increase the efficiency of monetary policy implementation on the economy.

Core inflation cannot reflect the actual cost of living if energy and raw food prices escalate dramatically.

This flaw has also been brought up by some economists.

HSBC Global Research said recently that the Bank of Thailand was the only major central bank in Asia left targeting core inflation, but in the end, the monetary authorities will respond to rising headline inflation even if core readings remain subdued.

"Further hikes are therefore in store in Thailand, with the benchmark policy rate to rise by 50 basis points by year-end to 3.75 per cent," the bank's unit said.

Tarisa said that since headline inflation has surged even as core inflation remains low, the central bank must restore consumer confidence by showing that inflation has been tamed so that it cannot threaten consumption, investment and exports.

"We have tried to angle inflation expectations in the medium term to pull inflation down to an acceptable level, otherwise consumers would rush to shop, bringing about a self-fulfilling proposition," she said.

The Kingdom faces inflationary risks, but concern for economic growth is minimal because of economic momentum and the government's stimulus package.

"It does not mean that we will not be interested in economic growth, but fiscal policy can boost growth," she said.

Interest-rate policy does not need to address the inflation problem if it does not contribute to a secondary effect where production costs are sharply shoved up by rising prices of oil and commodities.

The policy rate does not need to be slashed like the US federal funds rate because the Kingdom's business cycle is different, Tarisa said. Interest-rate policy will mainly react to domestic conditions rather than the interest-rate spread.

The United States is stepping into recession with a downside risk of inflation while other countries, including Thailand, have been facing an upside risk of inflation with good economic momentum.

The central bank, however, will closely monitor the changes in the global economic environment in order to react to conditions properly, the governor added.