The Bank of Thailand (BOT) is conducting a study to adjust its current core-inflation targets following a hike in oil prices.

The central bank is also studying whether core inflation remained a suitable targeting tool for monetary policy.

Governor MR Pridiyathorn Devakula said the BOT was considering a new range for its inflation target. For the past six years, the target has been set at between zero and 3.5 per cent. He said it would take about a year before the new range was implemented.

Last month, core inflation rose 2 per cent on year and headline inflation 4.2 per cent on year.

Assistant governor Atchana Waiquamdee said the central bank was also studying the advantages and disadvantages of core and headline inflation, in order to select a suitable monetary target for the current economic condition.

"We must study which kind of inflation target is appropriate for the country. The South Korean central bank changed its monetary target from core to headline inflation," she said.

This possible change to headline inflation has been debated among economists since the gap between headline- and core-inflation curves started growing larger and longer than usual. Government price controls, however, have blocked an increase in prices for goods, with rising oil prices having no pass-through effect on core inflation.

As a result, the core inflation rate no longer reflects the real picture for inflation.

Senior director Suchada Kirakul, however, said headline inflation, which includes energy and raw foods, was difficult to control, due to volatile prices, and that core inflation would likely to remain the means of judging the country's economic position.

Atchana said if the range of the inflation target were narrowed, the time frame for the target would be expanded, such as annually or by a set economic cycle.

Suchada said the monetary policy under the new range would have to reflect the economy better than the current range did, or else it would create problems.

"If we narrow the range, the committed time frame must be expanded; otherwise, we may miss the target. For example, it would be risky to miss the target if we adopted 2-3 per cent as the new range," she added.

More than 20 central banks have adopted various types of monetary-policy targets.

Some countries, such as the Philippines, use a narrow target range combined with a long-term commitment.

The BOT has currently committed quarterly core inflation to be its monetary target, while other central banks, such as Australia's, have adopted an economic cycle of five years.

Suchada said the central bank previously wanted to increase the range's minimum during the period of deflation a few years ago, in order to slash the policy rate to bolster economic growth. However, economic conditions improved without any policy change.

The change in monetary policy is part of the BOT's five-year plan to boost its efficiency.

The committed inflation target would be suitable for the economy within a certain period. The range of zero to 3.5 per cent is still being used this year in the belief that it can serve the economy for the next two years, during which time the economy is expected to experience excess liquidity and low inflation.

A proper rate of inflation in line with that of our trading partners would encourage the Kingdom's competitiveness and the baht's stability.

The BOT previously wanted to use headline inflation as the target, as it was felt core inflation did not reflect the real cost of living. But it realised that tightening interest rates while prices of energy and raw foods rose could have a major impact on domestic demand and economic growth.

Anoma Srisukkasem

The Nation