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.

The MPC therefore decided to cut the policy rate to provide as insurance to the economy in the face of greater downside risks to growth. With firmly anchored inflation expectations, the Bank of Thailand can today give weight to stabilizing economic developments when setting the interest rate. However, should the outlook for inflation, growth, or financial stability change in the future period, there will be room for maneuver to counteract such developments through monetary policy, as well as other policy tools in an appropriate mix deemed most suitable for achieving the overall macroeconomic stability. Limitations of monetary policy Let me now turn to a topic that I would like to highlight today, that is, the limits to what monetary policy can achieve. The global financial crisis has placed far greater demands on monetary policy around the world. In major economies where other macroeconomic policy tools are being impaired, monetary policy was under enormous pressure to support the economy. Central banks responded by expanding dramatically their traditional role as lenders of last resort and came up with innovative, unconventional ways to stretch beyond what monetary policy can normally do. In emerging markets, given large crisis repercussions in terms of excessive capital flows, monetary policy was at times expected to respond to external developments in dealing with global spillovers. Overall, monetary policy has been pushed into situations and actions that were previously unimaginable. Efforts by many central banks to overstretch its normal capacity may have led the public to expect too much from monetary policy.