The impact of the second minimum wage hike on inflation is expected to be limited, as most businesses manage to keep a lid on cost via increased production efficiency, encouraged in part by a highly competitive goods market. The BOT will however continue to closely monitor any inflationary impact of the wage increase. Policy challenges for 2013 While it may seem that the worst is behind us, one must continue to be vigilant of risks. It is crucial for policy to be forward-looking and proactive, quickly adjusting to changing environment and shifting challenges. As I have mentioned, the key immediate challenges is to preserve the right balance of policy mix, in order to ensure that each policy’s effectiveness is maximized and grounded on the basis of sustainable economic well-being, as well as safe and sound financial system. Toward these goals, the BOT has a number of functions to perform. Monetary policy and exchange rate policy The overriding objective of monetary policy continues to be the safeguarding of economic stability, which encompasses the dimensions of growth, inflation, and financial stability. This year, a key challenge will be in striking the right balance between providing sufficient support to growth while ensuring that financial stability is also preserved. In particular, a prolonged accommodative monetary policy may pose risks to financial stability if it  2  BIS central bankers’ speeches  encourages excessive debt accumulation, or induces overinvestment in risky assets as investors search for higher yields.

Financial imbalances or a bubble may develop as a result, further complicating policy decisions. Thus, the BOT will continue to closely monitor credit developments and household’s debt servicing ability, especially for the lowerincome group. Another key challenge will be the management of volatile capital flows, and implications of exchange rate movements on the real economy. In meeting this challenge, the BOT has at its disposal various policy options, ready to be deployed under different circumstances. The recently announced Capital Account Liberalization Master Plan was aimed in part to encourage Thai companies to diversify their investments abroad, including towards neighbouring countries, and operating their businesses more efficiently using local currencies. The initiative would help foster more balanced capital flows, and promote financial market development that facilitates the regional integration under the ASEAN Economic Community (AEC) in 2015. We will continue to support businesses in strengthening their abilities to cope with exchange rate fluctuations. Financial institutions policy It is now universally recognized that economic growth and financial institution development must proceed hand in hand. The development of financial institutions in Thailand has indeed seen a significant and continuous progress, which has greatly helped support economic activities over the years. Still, many steps must be taken to further enhance the financial system and promote a more efficient intermediation. To deepen financial access, the BOT will cooperate with relevant agencies to allow commercial banks and non-banks to offer microfinance services, under the business model appropriate for risks and behaviour of the targeted group.