When inflation is high for a long period of time, an important role for monetary policy is to ensure that inflation expectations remain anchored as the shocks work their way through the economy. If expectations become de-anchored and trigger a wage-price spiral, it can lead to inflation becoming persistent even after the shocks disappear. Raising interest rates has a mechanical effect on demand and inflation, and thereby on inflation expectations. But when interest rates are starting from unusually low levels, rate hikes are more powerful if they also create signalling effects that influence expectations directly. In this context, especially compared with the traditional focus on 25 basis-point increments, adjusting the pace of rate hikes is a key tool to signal our determination to fulfil our mandate and keep inflation expectations contained. And moving faster at the start of the hiking cycle clearly conveys our commitment to bring down inflation to our medium-term target. At present, inflation expectations remain relatively well anchored across a range of measures. But there are two reasons why it would be unwise to take this for granted. First, the shock is severely affecting the prices of those consumption items, such as groceries and petrol, that have the greatest influence on households’ inflation expectations. [15] The ECB’s Consumer Expectations Survey shows that, since February this year, both mean and median expectations for inflation three years ahead have risen by around 1 percentage point.
Against this background, it is timely that SEACEN Centre has initiated this course to explore the nature of financial intermediation, the role of financial markets in the allocation of resources and the need for appropriate regulatory framework. As regulators, we need to understand the concepts and the basics of the working, the pricing and trading strategies of the derivatives markets and instruments, how financial entities use them in risk management, as well as their potential impact on financial system stability. But more importantly, in these two weeks, we will benefit from the presence of a number of distinguished speakers that have kindly given up their time to be with us. I hope we will use this opportunity fully. On this note, I would like to thank Mr. Sunil Sharma, Chief, Asian Division, IMF Institute, for his efforts to coordinate this course with the SEACEN Centre and the Bank of Thailand. I trust that this course will be most fruitful and rewarding for all the participants, but above all that the interaction among yourselves will provide an opportunity for you to learn from one another, and strengthen the bonds of friendship that bind the works of our institutions for many years to come.