The chart shows the actual trade-weighted exchange rate (TWI) and expected TWI one year ahead as from 1998.3 When the krone is “weak”, the expected exchange rate one year ahead tends to be stronger than the actual rate. Likewise, the expected exchange rate one year ahead tends to be weaker than the actual exchange rate when the krone is strong. In the period 2002-2003, the krone exchange rate varied considerably. Movements in exchange rate expectations, however, were less  3  4  Consensus Forecast data were not available earlier. BIS Review 25/2004  volatile. When the krone was at its strongest in the second half of 2002, the expected exchange rate one year ahead was 4-5 per cent weaker. This illustrates that exchange rate expectations seem to be more stable than actual exchange rate movements and that after moving markedly beyond a long-term equilibrium level, the krone exchange rate is expected to revert to around this level. The equilibrium level for the nominal exchange rate is not, however, constant over time, but partly depends on price and cost developments in Norway relative to our trading partners. The advantage of a flexible exchange rate is perhaps most evident when the economy is sluggish. If the krone were to remain at a level that is too strong, nominal wages would have to remain unchanged over a longer period or fall in order to bolster companies and jobs. This only occurs when unemployment is very high.
Inflation is expected to remain low, with headline inflation around 2.8 percent. The second round minimum wage increase is unlikely to have significant impact on inflationary pressure, given that many firms are able to make necessary adjustments in reducing costs and increase productivity by shifting to more capital-intensive production. Robust domestic demand should continue to be the major driver for Thai economy. Private consumption is backed by many supportive factors such as the first-car scheme from the previous year and cuts in personal income tax and accommodative monetary and fiscal  BIS central bankers’ speeches  1  policies. Private investment is also expected to expand well, given the crowding-in effects of public infrastructure investment projects. Export sector should pick up pace towards the latter half of this year on the back of moderate recovery in the global economy. Nevertheless, there are still many challenges lying ahead for the Thai economy. The state of the global economy, while improving somewhat, remained fragile. And a firm recovery is still subject to risks and uncertainties. Domestically, although inflation seems to be benign, there is a possibility of rising inflation pressure from oil prices after global demand started to pick up gradually. Supply constraints, mainly from tight labor market, may also add on to wage-price inflation in the future. As a central bank, we always have to remain vigilant on price stability. Of more immediate concern; however, are potential threats to financial stability stemming from developments in asset prices as well as household indebtedness.