policy, as well as submit call reports on the calculation of the volume of trading book transactions and the calculation of the capital charge against market risk. ladies and gentlemen, another factor which will have crucial implications for the banking sector is the basel ii implementation. with the recent release of the basel ii framework, it is inevitable that we get ourselves ready for this international standard of capital adequacy. we all would agree that the new capital accord is for the betterment of banking system soundness for it signifies a move away from the one - size - fits - all approach to credit risk assessment in accommodation of evolving more sophisticated risk management of modern banking. specifically, under the new accord, it provides more comprehensive and risk sensitive approach to calculate regulatory capital, augmented by supervisory review process of pillar ii and market discipline enforcement of pillar iii. despite the novel complexity of capital calculation under pillar i, if a bank adopts the standardized approach, its calculated regulatory capital is only a proxy of the actual risks. i suspect that standardized approach is the one that most banks in emerging markets will adopt before they can meet the preconditions of irb, or the internal - rating - based approach, especially in the areas of data quality and risk management practices. therefore, only through proper pillar ii supervisory review can we understand the true risk profile of banks, so that capital requirement is set in line with the risks assumed by banks. to carry out this task, the authorities need to have the right prudential rules in place, as well as the supervisory capability and capacity. at the bank of thailand, we are developing prudential standards and risk - focused on - and off - site examination practices and manuals so that each supervisor can work on a common structured approach to risk analysis. moreover, a lot of resources have gone into supervisory training to equip our supervisors with the necessary tools and build up their sound judgment for the implementation. in parallel, the bank of thailand has proposed the new financial institutions businesses law to the parliament to give us the necessary legal basis to implement both effective banking supervision and basel ii. to foster pillar iii market discipline enforcement, the authorities are working on an appropriate safety net to replace the blanket guarantee that undermines the functioning of the pillar iii. it ’ s obvious that without lifting the blanket guarantee, market discipline will not work no matter how much disclosure is required. at present, the ministry of finance is in the process of reviewing the draft legislation on deposit insurance agency before submitting

tackle any supply shock should be one from the supply - side policy that mitigates its impact on production costs and the economy ’ s potential output. however, most supply - side policies take time. for example, it takes many years to improve the logistic system, education and skill attainment of the labor force, and institutional quality. on the other hand, alleviation measures such as promoting the use of alternative energy has had a limited impact on inflation. in the short run therefore, what is left as a clear option is to adjust the demand accordingly to ensure stability in the immediate future as well as the medium term. after all, it is also true that inflation is a monetary phenomenon and should be corrected by monetary policy. to make my point clearer, let me compare the current situation with the cake eating analogy. suppose that you gain happiness from eating cakes. i guess we all do. but one day you find out that you have diabetes. if you continue to eat the same amount of cakes, your health will be at risk in the near future. if you want to continue eating cakes, the solution is simply to get a direct medicine that lowers the sugar level in your blood. but what if the effect of the medicine takes a long time to become effective? for his survival, the patient has no option but to reduce the amount of cakes intake. this is exactly what the monetary policy is doing. it is a demand management tool to augment supply measures that take time to make an impact. if the effect of supply - side policy, the direct medicine for supply shock, is limited and rising inflation is a threat to the health of the economy, one must forego the happiness today for a better future tomorrow. ladies and gentlemen, you may then ask where the evidence of the demand pressure is. looking around, everywhere people seem to be tightening their belts and saving for the rainy days. here, i would like to highlight the readily accessible indicators on capacity utilization and unemployment. partly due to strong demand for thai products abroad, the average capacity utilization rate for the first five months of this year was the highest since the 1997 crisis. meanwhile, despite the unofficial figure of 2 - 2. 5 million labour immigrants, the unemployment rate has been hovering around 1. 5 % during the past four months. in fact, internationally, it is very difficult to find countries with similar or lower unemployment rates than thailand. the tightness of the labor market has manifested itself in the form of rising unit labor