Download → No. BOT.MPD.(02) 247/2566 Statement pertaining to average headline inflation over the previous 12 months residing abovethe upper bound of the monetary policy target

On November 30, 2022, the Minister of Finance and the Monetary Policy Committee (MPC) mutually reached the agreement to set the monetary policy target for price stability such that headline inflation is to reside within the range of 1 –3 percent for boththe medium-term horizon and for the year 2023. The agreement also designated the MPC to write an open letter to the Minister of Finance should average headline inflation over the previous 12 months or a forecast of average headline inflation over the next 12 months breach the target range.

On April 5, 2023, the Ministry of Commerce released the March 2023 data on headline inflation rate which came out to be 2.83 percent, leading to an average headline inflation rate over the previous 12 months (April 2022 - March 2023) of 5.86 percent—well above the current monetary policy target range. However, according to the MPC meeting on March 29, 2023, the MPC assessed that average headline inflation over the next 12 months (second quarter of 2023 - first quarter of 2024) would be 2.6 percent—residing within the target range. Pursuant tothe aforementioned agreement, this open letter issued by the MPC shall outline (1) key drivers causing average headline inflation over the previous 12 months to breach the target range; (2) potential time frame for headline inflation to revert to the target; and (3) monetary policy actions taken to guide headline inflation back to the target within an appropriate time period. Details are as follows.

Key drivers that caused average headline inflation over the previous 12 months to reside above the monetary policy target range

Over the previous 12 months, average headline inflation resided above the upper bound of the target range mainly due to large cost-push shocks. The surge in global energy and commodity prices due to the Russia-Ukraine conflict led to a significant increase in domestic energy prices, resulting in elevated average energy inflation rate of 20.06 percentover the past 12 months. In addition, domestic fresh food prices rose sharply due to various factors. Most prominent was an increase in meat prices, especially pork whose prices rose due to supply contraction following the African swine fluoutbreak at the beginning of 2022. Vegetable and fruit prices also increased as a result of their production being affected by fluctuations in weather conditions. Higher animal feed and fertilizer costs also added onto these price pressures, leading to average fresh food inflationrate of7.74 percentover the past 12 months. Meanwhile, demandpull inflation pressures became a bit more evident in line with the recovering economic activities. This enabled businesses to better pass on higher costs to prices of goods and services, although the degree of such cost pass-through remained somewhat limited. Such cost pass-through was most apparent in the prepared food category, leading to average core inflation rate over the past 12 months of 2.70 percent.

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