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.

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.