costs which in the first quarter of this year rose higher than productivity growth. this could be a sign of possible wage - price inflation. intuitive as it may seem, the cake eating analogy as well as several simple analogies you may have heard from our critics is not the whole story. what is missing in them is the reference to inflation expectations. our critics seem to have completely disregarded the important and long - lasting role of inflation expectations. strangely, concerns on inflation expectations, which feature prominently in the public discussion in other countries, seem to be relatively absent in this country. with your help, we can raise the level of public discussion about the forces underlying inflation here. again, central banks may be accused of being concerned on issues like inflation expectations that seem more academic than real. on this, i wish to emphasize that a valuable lesson from the previous two oil shocks thirty years ago is the role of inflation expectations in inflation developments. it is now well established that, independent of demand and supply shocks, an increase in the public ’ s long - term inflation expectations leads to higher inflation and lower output. failure to keep inflation expectations in check will lead to persistent increases in the price level well after supply shocks vanishes. this is why modern central banks pay so much attention to ensure that inflation expectations do not run away. in general, how well a central bank can anchor the public ’ s inflation expectations will depend on the extent in which the public perceived the central bank ’ s seriousness in fighting inflation. such credibility hinges critically on the central banks ’ actions and what the public expect it to do. words like “ behind the curve ” are often used to describe central banks that move too slowly to curb public ’ s inflation expectations. central bank, unlike the government which has a fixed term, has a greater incentive to care for economic stability. while the government tends to be more myopic in their policies, central bank is mandated to optimize the benefits across horizon. history has taught us that a popular central bank is not always the most credible central bank. a pro - growth central bank is prone to inflationary bias which undermines its credibility in fighting inflation. disinflation would then become more costly. inflation targeting is one framework to discipline the central bank by paying attention to price stability. it has been working very well for us and for many other countries in the world that have adopted the regime. but the challenge today is to find the right sacrifice ratio between economic growth and inflation. in addition

- unable to compete with either low - or high - income countries. if this trend continues, it will prevent us from reaping the full benefits of future economic integration. part of this may stem from structural changes in thailand ’ s endowment. labor is now scarce, increasingly mismatched and becoming more expensive. so, labor - intensive driven growth strategy is no longer applicable to thailand. it is important that we create new sources of growth. to achieve this goal, an improvement in technology, education and labor productivity via higher investment in physical and human capital are needed. another thing i would like to note is that, as in most developing economies, economic development is often associated with rising income inequality and social exclusion. thailand is no exemption. in fact, the economy has been growing unevenly. but growth without inclusiveness is not sustainable, because it can lead to deterioration of social solidarity, political uncertainty and finally affect economic growth. thailand ’ s economic development should, therefore, properly address the issue of equitable growth going forward. the bank of thailand ’ s role ladies and gentlemen, this leads us to the second part of my talk this evening. although short - term volatility has often caught us by surprise, there is a pressing need to consider longer - term issues. and to support long - term perspective, the bank of thailand has set economic and financial environment to support such goal. the bank of thailand always attempts to strike the right balance between economic growth and macroeconomic stability. monetary policy decision via interest rate setting has always been made while taking into consideration growth, inflation and financial stability dimensions. however, there are limitations that monetary policy cannot achieve. a single instrument, namely, the policy interest rate cannot target multiple objectives such as price stability, financial imbalances, exchange rate and capital flow simultaneously. the policy choices inevitably involve trade - offs between different objectives. policymakers will have to weigh carefully the costs and benefits of a policy decision. bis central bankers ’ speeches although exchange rate is not the bank of thailand ’ s main policy tool, or an intermediate policy target, sharp exchange rate volatility can have significant impact on exporters and small businesses with less capacity to adjust. the bank of thailand, therefore, constantly monitors the impact of baht movement on the overall economy and stands ready to use policy instruments to prevent and manage dysfunctional market conditions and excessive speculation. nevertheless, in the long - run, exchange rate should be determined by market mechanism and serve as an important price signal