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BOT to try again to base targets on headline, not core inflation

Inclusion of fresh food, fuel prices sought

The Bank of Thailand will propose to the new government a change in the way the central bank sets inflation targets, to make it easier to communicate its monetary policy.

BOT Governor Prasarn Trairatvorakul said the central bank would propose targeting headline inflation rather than core inflation, which excludes prices of fresh food and fuel and is currently used to guide monetary policy.

The proposed switch to a headline-inflation targeting framework is backed by the National Economic and Social Development Board and the Finance Ministry.

The inflation target is reviewed each year. It is proposed by the central bank but has to be approved by the government. The current 2014 target is for core inflation of 0.5-3.0 per cent.

A headline-inflation target would be easier for people to understand as they are accustomed to living costs that include everything, Prasarn said.

Regardless of the government's decision on this point, it will not affect the decisions of the central bank's Monetary Policy Committee, he said.

Prasarn said the central bank had earlier proposed the shift to headline-inflation targeting when Thirachai Phuvanatnaranubala was the finance minister, and he agreed to the plan. However, Kittiratt Na-Ranong, as deputy prime minister, disagreed. He asked for two more years before making the switch, noting the government's plan at that time to raise fuel prices, which could heighten headline inflation. Kittiratt was said to postpone the review twice, as changes to fuel prices were delayed.

"Actually, the BOT planned to propose the headline-inflation target to the Cabinet on December 9, 2013, but Parliament was dissolved," Prasarn said.

Recently the Commerce Ministry revealed that year-on-year inflation in April was 2.45 per cent, the highest rate in 13 months, due mainly to a sharp rise in the prices of food and non-alcoholic beverages at 4.61 per cent.

The inflation rate is likely to continue to be affected in the current quarter by the impact of drought on food prices. The ministry has forecast 2.4 per cent for the second quarter and 2 per cent for the first half of the year.

For the full year, the ministry believes that the inflation rate will be 2-2.8 per cent on the assumption that the economy expands by 3-5 per cent, the price of crude oil in the Dubai market is between US$95 and $115 per barrel, the foreign-exchange rate is Bt29-Bt34 per US dollar, and the government maintains measures to help ease people's cost of living.


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