, and the recent oil shock. the recent oil shock in particular proved to be a difficult test for the bank of thailand. high oil prices have two adverse effects : pressure on prices and a drag on economic growth. tightening interest rates is the bank of thailand's primary defense against inflation. however, high interest rates would burden firms and households already trying to cope with high oil prices. domestic demand would be adversely affected. there was no clear or easy choice to make. in the final analysis, the bank of thailand decided to tighten interest rates with the view that maintaining inflation stability, notwithstanding the short - term adverse impacts, was necessary for sustained economic stability and growth in the long run. i could go on with more of such examples from further back in time, but i am sure that you are well aware of them. however, the past is not always a good predictor of the future. and indeed, the thai economy is currently faced with a new kind of challenge. this leads me to my second point. the preeminent challenge to the thai economy in the medium term is how to cope with the unwinding of global imbalances, a slowdown in the world economy, volatile global financial markets, and an appreciating baht. thailand, like many emerging market economies with a small and shallow financial market, is particularly vulnerable to fast - moving international capital. such rapid movements of capital flows, if vastly out of line with the underlying economic fundamentals, can have negative impacts on the export or import sectors depending on the direction of exchange rate movement. in our case, the recent surge in speculative capital inflows has caused a rapid one - way appreciation of the baht relative to regional currencies. the appreciation, which was vastly out of line with our economic fundamentals, if left unchecked, could be detrimental to not only the export sector but also economic stability. in dealing with the rapid appreciation, conventional wisdom suggests an adherence to market mechanisms. this proved to be inadequate, and the baht continued with its appreciation. after a number of unsuccessful conventional measures, we resorted to the less conventional measure of imposing a reserve requirement on capital inflows in december 2006. the measure was designed to break the one - way momentum, to preserve overall economic stability, and to give the export sector time to adjust. to this end, it has succeeded. other regional currencies continued to appreciate while the thai baht had stabilized. the decision to

a clear need arise. let me discuss the policy tools at our disposal and how they fit into our overall policy objectives. on the interest rate, the policy rate has been on hold at 3. 00 percent since january this year. at the moment we view it as supportive of growth amid global risks and consistent with our inflation target. however, i must stress that the interest rate is poised to go either way depending on developments in the advanced economies, in particular the euro area and the impact on the overall thai economy. we recently saw how the impact of the euro crisis is spreading to asia in the form of a broad - based slow - down in thai exports. incoming data will need to be carefully analyzed to determine the severity of the impact on the overall thai economy. on the exchange rate, we maintain a managed - float regime. the thai baht has been quite volatile of late amid concerns over the euro. nevertheless, it remains broadly in line with economic fundamentals and thus is market determined. the exchange rate should be managed sparingly and only in unusual circumstances of market dysfunction or economic misalignment. by allowing the exchange rate to be market determined, it can serve as an automatic stabilizer in the short - term and as an important price signal and catalyst for structural change in the long - term – an issue i touched on earlier within the context of unleashing domestic engines of growth. nevertheless, should the euro crisis result in market dysfunction or significant misalignment of the exchange rate, exchange rate intervention to stabilize markets or re - align exchange rates with fundamentals may be warranted. on macroprudential policy, a framework is needed as the bank of thailand ’ s mandate covers both monetary and financial stability. macroprudential policy focuses on financial stability. monetary policy focuses primarily on price stability. macroprudential and interest rate instruments therefore primarily serve different objectives. prudential measures constitute the first line of defense against financial imbalances by serving as “ sand in the wheel ”, so as to dampen the financial cycle, weaken pro - cyclicality, and hence reduce the propagation of financial shocks. the interest rate tool, in comparison, is too blunt. however, as the last line of defense, monetary policy can be used to lean against the winds of excessive asset prices. the prudential measure we implemented some time ago – a loan - tovalue limit of 90 percent for condominium purchases – is an example. the measure in itself is