. loan - to - deposit ratio, including b / e, was at 83. 9 percent in april. bank credit continues to grow on a year - onyear basis, but fell by 2. 7 percent since december last year. the decline largely reflects the fall in corporate loan demand on account of the slowing economy. consumer credit and mortgage loans, on the other hand, continue to register positive growth, and this has provided an important underpinning for consumer spending thus far. inflation, on the other hand, continues its downtrend in may, and although we see inflation numbers turning negative, the current uptick in commodities and asset prices, together with signs of greater stabilization in the real sector, help lessen the concern regarding deflation risk. against this background, the monetary policy committee in its meeting on may 20th held the view that monetary policy has been substantially eased and the current policy rate at 1. 25 percent remains supportive of the economy. two implications must be drawn from this decision. first, given the low policy rate and the ample availability of liquidity, more gains could be made by ensuring that, at the current policy rate, the benefits of past rate reductions are passed on more fully to consumers and the private sector through corresponding adjustments in the banking system ’ s interest rates. the second implication is that, while the emerging signs of stabilization are positive and are consistent with the developments on a worldwide basis, they must be treated with caution given that the current state of the global economy and financial markets are still far from normal. hence, the mpc will continue to monitor closely the uncertainty surrounding both domestic and external economic conditions, and stand ready to implement appropriate monetary policy to support economic recovery in the period ahead. turning now to the banking sector. the thai banking sector was able to weather the impact of the global financial crisis with a relatively strong initial position. these strengths are found in the sector ’ s strong capital base, its limited exposure to subprime - related and other toxic assets, and its low reliance on external funding. as a result, the impact of the crisis on the thai banking system so far has been limited. the thai banking system is resilient with good fundamentals, and continues to function normally to support the economy. in the last two quarters, despite the consecutive negative gdp growths, the performance of the thai banking sector remains satisfactory. the sector continues to see profits in the last two quarters, while the increase in the non - performing loans has not been

increase in the liquidity that is not directly controlled by central banks. “ now you see it, now you don ’ t : risk in the small and in the large ”, february 2007 figure 4 : estimates of global liquidity source : independent strategy a particular development of interest to us has been the increasing integration of housing finance into these liquid international markets. a recent article in the financial times 3 reports on a significant slice of new mortgages in hungary being issued in swiss francs while households in latvia and romania are borrowing in yen. the article then goes on to focus on what they see as one of the biggest flows, the bonds denominated in nz dollars by european and asian issuers. 3. what are the global effects of this liquidity? the flows associated with the growth of global liquidity has played a role in helping to prolong the period of strong global growth seen in recent years. the associated search for yield has pushed down interest rates, bid up equity prices and generally put downward pressure on returns across a range of asset classes. many of these effects have been clearly welfare - enhancing. but in contrast to how markets might have reacted a decade ago, it has also allowed less disciplined economic behaviour by some households and firms. it has allowed global imbalances, particularly those associated with the contrasting current account positions of the major economies, to build up and persist beyond what might have previously been considered sustainable. it has meant that when large economies operate with distortions in their own markets, those distortions can be felt halfway around the world. risk appetites in global financial markets have generally been very strong in recent years. this perhaps reflects the extended period of relatively strong growth in the world economy underpinning investor confidence. this confidence has been bolstered by generally low market volatility, which has also lowered perceptions of risk. “ why the yen borrowing game could end in players taking a tumble ”, 14 february 2007 figure 5 : risk aversion and market volatility source : bloomberg ; datastream perceptions of a relatively benign risk environment have provided the basis for investors to engage in a vast range of so - called “ carry trades ”. these involve borrowing to invest in an asset that is either yielding – or is expected to yield – a higher rate of return than the borrowing cost. in this regard, relatively low risk aversion and market volatility are important conditions for carry trades, so that traders are less fearful that sharp market moves could eliminate the expected yield