But the overall economy needed some breathing room to afford a smooth transition. After a number of unsuccessful capital account measures, we resorted to imposing a reserve requirement on capital inflows in December to break the rapid one-way momentum and preserve overall stability. To this end, the measure has succeeded in its task. To be sure, no measure is cost-free. The reserve requirement has imparted a wide-ranging effect on the market and the economy. In response to this, once the appreciation momentum was broken, we have been carefully modifying the coverage of the measure to allow greater flexibility for business operations without compromising the needs to contain excessive volatility. We did this by providing the option to hedge fully for loans and inter-company loans. At the same time, significant relaxations on capital outflow were undertaken earlier this year to bring about a better balance between inflows and outflows. Let me be clear that the reserve requirement was designed to preserve market stability and to afford the real sector, which includes many SME operations, time to adjust to a more volatile market condition. To be clear, the reserve requirement was not designed to maintain a certain exchange-rate level. While the measure was necessary, we recognize its negative long-term effects and the adverse consequences on investor confidence and financial market development. As such, let me emphasize again that the reserve requirement is not a permanent measure; it is temporary. Its need is subject to constant review by the Bank of Thailand as the situation develops.
The real-economy indicator that in my opinion is the most appropriate to focus on is unemployment.22 Monetary policy should thus try to stabilise unemployment around the rate that is assessed as sustainable in the long run. How well are the targets met? Inflation is currently very low. In October, CPI inflation was 0.4 per cent. According to the Riksbank’s forecasts it will be below one per cent as an annual average in both 2012 and 2013. However, CPI inflation is affected by the Riksbank’s repo rate changes and the cuts in recent years have contributed to the low CPI inflation. But CPIF inflation, which gives a better picture of inflationary pressures in periods of large interest rate adjustments, will be around one per cent as an annual average in 2012 and 2013. Thus, inflation is far below the target, whichever measure one uses. According to the National Institute of Economic Research’s assessment of the Swedish economy in August 2012, both CPI and CPIF inflation will be well below the target in both 2013 and 2014, despite the forecasts assuming a much lower reporate path than the Riksbank’s.23 Sweden has the lowest inflation in the European Union. What about developments in the real economy? The outlook is poorer than before for both the world economy and the Swedish economy. Swedish exports have slowed down substantially and growth is now expected to be weaker. Unemployment is very high, 7.8 per cent in September, when seasonally-adjusted, and moreover it is rising (Figure 5).