Prasarn Trairatvorakul: Bank of Thailand's policy direction in 2011
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at the Bank of
Thailand, Bangkok, 26 January 2011.
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With retrospect, the year 2010 testified to the strength and resilience of the Thai economy.
Economic activity was able to continue uninterrupted, despite various unfavourable shocks
such as political unrest, volatile capital flows, flood, and delayed economic recovery in some
advanced economies. Policy measures, both monetary and fiscal, had been supporting
factors. The economy expanded by as much as 8 per cent in 2010 as a result.
Given the strong growth momentum and solid economic fundamentals, the Thai economic
growth is expected to expand at 3-5 per cent this year. This pace of growth is consistent with
the long-term potential growth of the economy, and is an indication that the economic activity
has returned to its normal, more balanced state. This is in contrast with the catching up
episode last year, characterized by extraordinary growth rate.
As the economy operates closer to its potential, the demand pressure on prices will begin to
accumulate, and consequently inflation is projected to be higher than those registered in the
last couple of years. The rising costs, stemming largely from commodity prices, can further
add to upward pressure on prices. Upside risks to inflation should return to focus this year,
while the downside risks to growth should continue to abate. Meanwhile, many risk factors of
the previous year may continue to pose threat. For example, episodes of volatile capital flows
may return, while the economy's long-term competitiveness remains in need of improvement.
Policy objectives in 2011
The Bank of Thailand envisages two economic policy objectives this year: (1) to safeguard
macroeconomic stability, and (2) to continue strengthening underlying fundamentals of the
economy. Both objectives should be interpreted in the broad sense, for example,
macroeconomic stability entails price stability, financial stability, as well as fiscal
sustainability. Likewise, strong economic fundamentals encapsulate resilient private sector,
efficient public sector, and sound banking sector among others. Given these broad goals, the
Bank of Thailand and everyone all have parts to play. The government, for example, is in
charge of ensuring a sustainable fiscal position in the long-term, and an efficient
disbursement of budget so as to best strengthen the economy.
Monetary policy
Maintaining economic balance is key to the making of monetary policy, as it is one of the
most important pre-requisites of macroeconomic stability. In practice, this means that as the
economic activity returns to normalcy, monetary policy stance must similarly be normalized.
Failure to do so will add undue pressure on inflation, ultimately posing risks to
macroeconomic stability. Thus this year, the monetary policy committee (MPC) will need to
continue normalizing monetary policy.
The amount and pacing of policy interest rate adjustments this year will be consistent with
the outlook for growth and inflation as well as the surrounding risks. As always, the policy
decisions will be grounded on informed and prudent deliberation by the MPC, with an aim of
keeping core inflation within the target band as mandated by law. Because many shocks,
both of temporary and structural nature, cannot be foreseen, it is difficult to say beforehand
what level of policy interest rate should be appropriate for this year. However, sustained
negative real interest rates are usually not consistent with fostering economic balance.
Timely adjustments in policy interest rate will help keep inflation pressure in check, which in
turn lead to low and sustainable borrowing costs in the long run.
The Bank of Thailand has taken steps to enhance the transparency of Monetary policy
making, by announcing the MPC voting result together with the statement for the first time
early this month. The first minutes of the meeting has also been released this morning. It is
hoped that these information will help businesses and households understand the rationales
behind the MPC policy decisions, and enable them to make better and more informed
economic decisions.
Exchange rate policy
The Bank of Thailand adheres to our policy framework, where exchange rate is not a policy
instrument and hence is market-determined. However, recognizing the risks of high volatility
in capital movements looking ahead, the Bank of Thailand has followed a three-part
approach.
The first is to develop a systematic capital flows master plan, with sequencing appropriate for
the development of the Thai economy and the evolving international financial market. Part of
this plan is to relax regulations that hinder Thai residents from investing abroad, in order to
foster more balanced capital flows.
Secondly, the Bank of Thailand will encourage the use of appropriate financial hedging
instruments, in order to strengthen the risk management capability of the private sector,
especially the small and medium-sized businesses. Given the possibility of more volatility in
the financial market looking ahead including the exchange rate, those businesses with
sufficient hedging capacity will be able to absorb shocks better.
In preparation for any extreme event with respect to capital flow's volatility that may pose
risks to the economic stability as a whole, the Bank of Thailand has prepared various options
of regulating capital flows, with varying degrees of control. This constitutes the third plan.
These three-pronged plans should ensure that the Thai economy has enough resilience and
safeguard to meet challenges of capital flows.
Financial institutions policy
Effective implementation of monetary policy requires a strong system of financial
intermediaries. An important characteristic of strong financial institutions is the ability to
recognize and adapt swiftly to changes in the financial environment, domestic and abroad.
For example, the ongoing process of economic and financial globalization will bring about
ever closer interconnectedness and more volatility that will continue to challenge businesses
and financial institutions. Meanwhile, the advent of modern financial tools, while enhancing
the risk management capability for businesses, can also bring about closer and more
complex integration between the capital market, the money market as well as the insurance
industry. On the other hand, from the perspectives of consumers themselves, greater
demand for funds and financial services is often constrained by limited financial access.
The appropriate course of policy on financial institutions must take into consideration
challenges posed by these trends of changes. In this context, the Bank of Thailand sees
three policy priorities going forward: (1) to preserve the soundness of the financial institution
system, (2) to enhance the efficiency of financial intermediation, and (3) to place emphasis
on consumer protection.
The soundness of financial institutions is the major foundation of macroeconomic stability.
Currently, financial institutions are in top conditions, with NPL ratio last year as low as
3.6 despite credit expansion of 11.3 per cent. Banks' capital is also much higher than
recommended international standards. This strong soundness must be preserved. The Bank
of Thailand will continue to apply micro-prudential approach to the regulation of financial
institutions, to ensure that financial institutions put in place appropriate risk management
framework, are prudent in extending credits, and maintain sufficient level of capital according
to new international standards such as the Basel III guideline.
The recent global economic crisis highlights the importance of extending the coverage of
supervision to foster the soundness of system as a whole, in addition to individual
institutions. "Systemic risk", in particular, can pose serious threat to macroeconomic stability
at large. The Bank of Thailand has taken steps to guard against the potential development of
such risk, by establishing macro-surveillance framework that provides early warning about
areas that may be under threat. In practice, Thailand is also among the first countries to
implement "macro-prudential policy", the application of supervisory and regulatory policy in
pursuit of system-wide financial stability.
The second policy priority is to continue enhancing the efficiency of financial intermediation.
The Bank of Thailand will encourage a more widespread provision of hedging instruments
and will seek to improve financial access especially for small and medium-sized businesses
and retail customers. In addition, for businesses, people and government agencies to receive
fast, safe and efficient payment services, the Bank of Thailand will work with all related
parties to promote electronic payments such as using money transfer instead of cheque
usage and using debit card instead of cash payment, which would reduce payment costs and
allow government and businesses to manage cash more efficiently. The goal is to ensure
that all parts of the economy benefit from the strong and stable financial system, an aspect of
what constitutes an "inclusive growth".
The third and last policy element is consumer protection. Consumers of financial services
have the rights to good quality of services and fair protection. The Bank of Thailand
encourages financial institutions to disclose all relevant information, including fees, to
consumers before providing services to them. Financial institutions should also educate their
customers, and provide financial services that are suitable both in terms of business and risk
management capability of the customers, followed by dedicated after-sales services.
Improvements along these lines will further strengthen growth inclusiveness.
Other policies
The Bank of Thailand will also seek to strengthen the economy through its other functions. In
managing international reserves, the Bank of Thailand advocates further diversification by
expanding the investment asset universe, as permitted by the new royal decree. The Bank of
Thailand also supports a speedy repayment of outstanding FIDF debt, based on the
principles of monetary policy independence and long-term fiscal discipline.
While monetary and financial stability certainly provide a favourable backdrop, the economy
cannot prosper on the back of these alone. The nation's competitiveness, in particular, needs
to be strengthened and improved further. The private sector should continue to place greater
emphasis on innovation and seek to compete on the basis of quality rather than prices. The
public sector, meanwhile, must ensure that a sufficient part of budget is set aside for
infrastructure investment on a sustained basis, which will help improve the productivity and
benefit all parts of the economy in the long run. Joint efforts by all sides are needed to
achieve our common goals of macroeconomic stability and economic strength and
prosperity.