Central bank likely to stick to 0.5-3% core inflation target

Economy May 10, 2014 00:00

By Erich Parpart
The Nation

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The Bank of Thailand will likely maintain its core-inflation target for this year at between 0.5 and 3 per cent, although the forecast range will be an unofficial one.

Roong Mallikamas, spokeswoman of the central bank, said yesterday that under normal circumstances, the annual inflation target would be submitted to the Cabinet for approval by December of the preceding year, but the proposed target for 2014 had never been officially approved because of the dissolution of Parliament in early December. 
The dissolution of the House of Representatives means the Monetary Policy Committee (MPC) has had to adopt the latest approved target for 2013 as the current targeted range, but this is not a problem as it happens to be the same as the proposed target for 2014 – at 0.5-3 per cent – anyway, she explained. 
Core inflation last month stood at 1.66 per cent, which was the highest level in 13 months.
When asked if the MPC would adjust the inflation target midyear due to rising prices and the slump in personal income due to economic turbulence, Roong said this was not likely.
“Once an annual target has been adopted, the MPC is unlikely to propose a change to that target because of the importance of commitment to the target, which would in turn have a direct implication on monetary-policy credibility,” she said.
She added that the upward inflation trend of the past few months was mainly due to the gradual adjustment of the price of cooking gas, which had increased the cost of processed-food items. However, the cooking-gas price rise was expected by the central bank.
“The schedule for cooking-gas price adjustment was widely known, and was already incorporated into the bank’s inflation forecast for this year,” she said.
As to the chances of this having a domino effect on other prices, Roong said such an impact was expected to continue to be limited because of the lack of demand pressure in the present economic and political climate. 
“There could be some adjustment to the inflation-forecast numbers for 2014 as more actual data roll in, but the central bank is still quite confident that the inflation out-turns for this year will be close to our present forecasts,” said the spokeswoman. 
On the likelihood of missing the target this year, she said the chances of doing so were very slim. Moreover, since 2000, there was only one occasion on which the target had been missed – in the second quarter of 2009. 
The process of setting the annual inflation target for 2015 has not yet begun, she added.
As for the switching of the monetary-policy target from the core-inflation basis to headline inflation, Roong said it should be viewed as the direction in which the MPC aimed to move, but there were many factors that could influence the timing of such a switch.
Bank of Thailand Governor Prasarn Trairatvorakul said last week that a headline-inflation target would be easier for people to understand, as they were accustomed to living costs that include everything – unlike core inflation, which excludes the prices of fresh food and fuel.
The MPC meeting last month viewed the proposal to switch the inflation-target method as appropriate, but the caretaker Cabinet suggested a postponement of the change because of a number of special circumstances factors this year, such as a sharp rise in global oil prices and reform of the domestic energy-price structure, Roong said.
These circumstances will ease over time, she added, but the shift to headline-inflation targeting will most likely continue to be delayed because of them.
Moreover, the absence of a permanent government and the ongoing political turmoil will continue to pose complications for a switch, since the previous proposal to do so had also failed to gain official acceptance because of the dissolution of the House.