Specifically, it reminds us how powerful the expectations channel of monetary policy transmission can be. It is therefore of utmost importance that central banks properly manage expectations so as to maximize monetary policy effectiveness and maintain policy credibility. This draws me to the focus of my talk this evening: the limits of monetary policy, namely, what monetary policy can and cannot do. Given unprecedented economic headwinds of various sources, monetary policy around the world has been under immense demand. But these expectations, if unrealistic and not met, could damage central bank credibility, and end up diminishing central banks’ influence, with unnecessary costs to the economy. Thus, it is important that central banks establish realistic public expectations on their policy. But before I turn to that topic, let me first review current economic conditions, the outlook for the Thai economy, and recent monetary policy response. Recent economic developments and monetary policy response Despite robust economic growth of last year, the Thai economy started out this year with moderation. Growth in the first quarter at 5.3 percent compared to the same period last year was lower than what we had expected. Part of this slowdown may have been a natural reversion to a more normal pace of growth after a strong post-flood acceleration. But that alone may not explain the whole story. Evidently, the recent slowdown in private consumption also owed in part to lower farm income and higher household debts which may have held back consumers’ willingness to spend.

Meanwhile, uncertainty about global demand may have pulled back private investment especially in the export-oriented sector. On the external front, despite some incipient signs of gradual improvements in the US and Japanese economy, disappointing Chinese and Asian economic performance likely put a drag on the overall Thailand’s trading partners’ growth and hence continue to weigh on Thai exports. Looking ahead, however, the medium-term trajectory of the economy should remain intact backed by solid economic fundamentals, including high levels of employment, rising income and robust private sector confidence. Fiscal policy should continue to lend support to the  BIS central bankers’ speeches  1  economy especially with the large-scale infrastructure investment expected to phase in from the latter part of this year. This would potentially generate a favorable crowding-in effects on private spending. As for price and financial stability, inflation eased further due to lower oil and commodity prices, in line with subdued global inflationary pressure. Looking ahead, however, the cost pass-through to prices is expected to increase as domestic demand picks up. At the same time, risks to financial stability remained an ongoing concern with a particular attention given to household debts and some sectors in real estate market. In light of these recent developments, the MPC judged that downside risks to growth have increased both from domestic demand slowdown and a somewhat slower-than-expected global recovery. Although the view on the medium-term outlook of the Thai economy has not changed, the balance of risks now seemed to tilt towards growth rather than inflation.