sharply. the banking sector, however, has been resilient given the low direct exposure to the toxic assets, the low reliance on global liquidity as a source of funding, and the strong capital base. the fact that the thai banking sector remains safe and sound is no accident. it is largely the result of continuing improvement in risk management capacity of the banking sector following the asian financial crisis, under a stronger regulatory framework and risk - based supervision. compared to some countries at this time, the banking sector in thailand is functioning normally, with the financial markets remaining relatively stable despite greater volatility and uncertainty in the global economy. at the bank of thailand, we are optimistic that policy efforts at the global level will be successful in stabilizing the financial markets and in providing a comprehensive solution to the current crisis. nevertheless, our view is that the adjustment that follows, and hence the process of global recovery, will probably take time. more importantly, in the thai context, given the global nature of the crisis, and the fact that our economy has been affected mainly through contagion, it will be difficult for an economy like thailand to achieve a sustained recovery on our own, if the global economy does not recover. therefore, in the context of policy, the focus of policy response in thailand should be on helping the economy and the private sector to adjust to the impact of the crisis, while ensuring that the key economic institutions and systems 6 most importantly the banking sector 6 continue to function normally, so that the economy will be in a position to move forward quickly once the crisis storm passes. it is in this context that the bank of thailand has been shaping our response to the current economic downturn. the response so far includes an aggressive easing of monetary policy, ensuring adequate liquidity to the financial markets and the banking sector, helping banks to better manage the increased risk in lending by introducing a government - sponsored credit guarantee scheme for smes, and encouraging banks to act early in assisting customers with debt rescheduling or debt restructuring so as to ward off the pressure on asset quality and on the non - performing loans. these are the direction and the measures we have taken in our response to the crisis, and more will be done if needed to ensure a smooth adjustment in the economy and the financial sector. judging from what we are seeing in terms of the recent broad global developments, i am confident that the combined effects of the fiscal stimulus by the government and the financial measures that the bank of thailand has

the high price of oil is probably the most important external risk to the economy. however, this risk poses varying implications for economic growth and stability. our macroeconomic forecasting model shows that the impact of higher oil price on economic growth is likely to be less pronounced compared to its impact on inflation and economic stability. this can be attributed to the fact that the economy still has substantial momentum to support growth. exports and private investment, in particular, are expected to grow on the back of continued global recovery, a high level of capacity utilization, and conducive financial conditions supported by a turnaround in credit extension of the banking sector. moreover, the economy is now in a much better position to weather external shocks, thanks to an improved external position and the strength of domestic demand. in addition, the government ’ s much improved fiscal position should allow the economy to adjust to higher oil prices without interrupting the growth momentum. it is, therefore, our view that the risks to growth from the higher oil prices should be manageable. on the other hand, the impact of the higher oil prices on economic stability is expected to be more pronounced. latest data on headline inflation continue to show signs of price acceleration. in august, thailand ’ s headline inflation therefore rose by 3. 1 percent year - on - year, while core inflation rose by 0. 7 percent year - on - year. with a narrowing of the output gap and reported tightening in some segments of the labour market, we believe that there is considerable pent - up price pressure building up in the system that could eventually translate into higher consumer prices. our inflation forecast points to a higher probability of rising domestic inflation going forward. thus, with growth momentum remaining firm but with prospects for higher inflation, the monetary policy committee saw less need to keep interest rates at low levels. the committee was of the view that monetary policy should be more focused on economic stability, with the adjustment being gradually paced. this was the rationale behind the increase in the policy rate in august. ladies and gentlemen, adjustments in the financial markets following the policy rate increase have been orderly. there has been an across the board increase in short - term money market rates as well as a rise in bond yields. but given present excess liquidity in the system, there will be some time lag before the corresponding adjustments in deposit and lending rates take place. going forward, especially as the economy ’ s expansion gains further momentum, monetary policy will need to maintain economic stability and to ensure that