yet again the ongoing pressure on monetary policymakers to take action. moreover, inflation could be fuelled further if corporate profits and wages increase more strongly than expected. to sum up : the surface of our engine isn't quite as hot as it used to be. but at its core, it is still overheated and needs to be cooled down further. 4 orderly transmission of monetary policy so far, i have explained how we expect the economy and inflation to develop. in addition, we are also analysing how financing conditions in the euro area are changing. the financial sector plays an important role in the process of monetary policy transmission. when economists talk about " transmission ", we are referring to how the effects of monetary policy measures pass through to the economy and prices, for example via financing conditions. interestingly, this is another thing that cars and monetary policy have in common – they both need a good transmission. an economy is a complex entity. for this reason, monetary policy is transmitted through a wide variety of channels, including one that we call the " interest rate channel ". through this channel, our interest rate increases impact the costs of borrowing. this makes it more expensive for households and enterprises to take out loans. as a result, their demand for loans falls. this dampens the demand for capital and consumer goods at first and then, over the medium term, inflation as well. according to our analyses, lending rates have developed broadly as we would have expected given the economic environment and the changes in key interest rates. 2 4 / 7 bis - central bankers'speeches from a macroeconomic perspective, the higher lending rates and the resultant weakening of lending growth are thus no cause for concern. on the contrary, these are signs that the transmission process is working. another channel for the transmission of monetary policy is the lending behaviour among banks. recently, there were concerns that banks might excessively restrict access to loans following the turmoil in the financial markets during the spring. in economic jargon, these would be referred to as " credit supply restrictions ". too many of these would cause a " credit crunch ", which would slam the brakes on the economy. banks in the euro area have, in fact, gradually tightened their lending conditions over the past few quarters. they justified this tightening mainly on the basis of higher credit risk among borrowers and the bleaker economic environment. although tighter lending conditions may sound problematic at first, this is also an important channel through which tighter monetary policy can take effect

prasarn trairatvorakul : thai monetary policy in the environment of excess global liquidity speech by dr prasarn trairatvorakul, governor of the bank of thailand, at the thailand focus 2011 – enhancing thailand ’ s competitiveness over the next decades, bangkok, 28 march 2011. * * * ladies and gentlemen, it ’ s an honor to speak before you today at the thailand focus conference. early this morning you heard prime minister abhisit vejjajiva speak on thailand ’ s competitiveness ; and later finance minister korn chatikavanij on fiscal policy. to close the circle, i will speak on monetary policy to complete your view on the investment opportunities and prospects of the thai economy. as international investors, i believe, you want to have a firm understanding of the country ’ s policy environment. this is what i will discuss today – the monetary policy options going forward in light of my assessment of the global economy and the thai economy. the assigned title of my talk today is “ thai monetary policy in the environment of excess global liquidity ”. let me stress that i have a different opinion on the issue of excess global liquidity than most. global liquidity is currently problematic in the sense that it is fluid, rather than excessive. let me discuss why. first, let me give you my assessment of the global economy. the global economy has entered a phase of fluid global liquidity amid uneven recovery and shifting risk appetite. this phase is characterized by weak recovery in the advanced economies which prompted loose monetary policy and extraordinary monetary measures such as qe2 in the us that have resulted in artificially low interest rates in the advanced economies. these record - low interest rates encouraged investors to seek out higher return in risky emerging market assets, particularly here in asia. in addition to the push factor of low interest rates and weak recovery in the us and euro area, strong economic fundamentals in asia, as reflected in growth and eventual currency gain, served as a pull factor. as a result, capital became more “ fluid ” – constantly in search of yield and therefore very sensitive to news and rumors. such search for risky yield resulted in capital inflows into eme assets last year, as you all know. these inflows contributed to the large appreciation of the thai baht last year, and indeed other emerging markets. here i want to emphasize that the inflows was due to a reallocation in global portfolio, or a