The differences compared with developments during the inflationist and unstable 1970s, often entitled “The Great Inflation”, have been so notable that this development has been awarded its own title in academic research – “The Great Moderation” 6 . Although the reasons for the greater real economic stability are not entirely clear; there are hypotheses that economies have undergone various types of structural changes which have subdued the fluctuations – such as improved stock management among companies and financial innovations – or that the shocks to the economies have quite simply been smaller than during the 1970s. However, it is most likely that a better monetary policy has played some role in the increased real economic stability. We have thus established what a central bank’s primary tasks should be: to maintain price stability, to promote stability in the financial system and – as long as the nominal anchor formed by the price stability target is not threatened – to try to stabilise the real economy. There may nevertheless be reason to provide an example of what is not an appropriate objective for a central bank. As I have tried to emphasise, the real economic objectives that central banks have entail stabilising real quantities such as production and employment. By stabilising I mean that one tries to reduce the fluctuations around the long-term trend. However, it is important to realise that this long-term trend development is not something that monetary policy can directly influence.
High inflation therefore erodes price competitiveness of our export sector which is perhaps the economy’s only reliable growth engine at the moment. In the current environment where trying to squeeze more growth from domestic demand could lead to the situation of wage-price spiral where wage and price increases feed in each other, the MPC’s latest decision could thus also be viewed as an attempt to maintain growth along with price stability. While there are certain limits to what inflation targeting can achieve, after all it is not a cure all medicine, the focus on price stability makes the regime suitable to the rapidly changing global environment. Just a few years ago, supply expansion in countries like China and India contributed to a downward pressure on global prices. Today, the tide has turned and it is now strong demand in these countries that fuel rising energy and commodity prices. Going forward, it is expected that global price swings may become more unpredictable, in terms of duration and turning points. In this context, anchoring of inflation expectations offers the economy some protection from global price volatility. Ladies and Gentlemen, Let me turn to address the second question on the future dynamism of Thai economy. In this regard, I would like to emphasize that the situation in Thailand is not as bad as you might think. In fact, the fundamentals and room for maneuvering the right policy mix remain strong. Allow me to elaborate. First, Thailand continues to preserve a strong external position.