With inflation at 1.6%, continuing downward pressure from the appreciation of sterling, and with slack remaining, the current inflation environment is benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses. Our latest forecasts show that, if interest rates were to follow the path expected by markets – that is, beginning to increase by the spring and thereafter rising very gradually – inflation would settle at around 2% by the end of the forecast and a further 1.2 million jobs would have been created. In other words, we would achieve our mandate. There is, as always, uncertainty about the future. But uncertainty does not mean stasis. You can expect interest rates to begin to increase. The exact path will depend on the economy. Our assessment will undoubtedly change as the economy evolves and policy will of course be adjusted if geopolitical events have a material impact on the outlook. If indicators suggest the economy is moving more slowly towards our goals, we will have learned that we are further from sustainable capacity. Prospective wage and unit labour cost growth will be weaker. Rates will go up later and more gradually. And should we see faster progress, prospective wage and unit labour cost growth will be stronger, which will suggest we are closer to maximum capacity and that the economy can sustain higher rates sooner. In all events, rate rises can be expected to be gradual and limited compared to the experience of the UK in the past.
As this has been the system for a very extended length of time, one ends up with a lot of people being paid a lot and doing very little. As such, people don’t move on in jobs or move out of jobs if they are not competent as might happen with a proper pay system. However, a problem identified is halfway solved as the saying goes. And I am happy to note that outsiders and stakeholders who have had to work with the Bank of Thailand lately are very receptive to the change and are saying much nicer things about us and our work. I also sense that the staff are seeing that things are better and will probably give enough support to the restructure. BIS Review 86/2000  4  Ladies and gentlemen, To get back to the topic of the economy: two years ago I said that we would reduce interest rates as the basic strategy for saving the country. This we have done and now the 14-day RP, the monetary instrument we use to transmit monetary policy to the general economy, is at only 1.5%. The lowest lending rate is 7.5% - what a difference from when I talked to you two years ago. The currency is now at around 42 baht to the dollar, which some people consider weak. Yet when compared to the 22 competitor countries, it has not much depreciated in the last two years.