narrowing and some tightening in the labour market reported. overall external stability, on the other hand, remains strong with continued current account surpluses, falling external debt, and higher international reserves. but the higher oil prices and the rebound in investment have evidently put greater pressure on imports and the trade balance. one thing that we have been monitoring more closely this year is financial stability. some indicators of financial fragilities are rising. these include rising household indebtedness and a very active real estate sector. although there are no signs of overheating as yet in these two sectors, their developments need to be monitored closely especially with the credit cycle now turning. this is because they have the potential to become a source of financial fragility if their growths are left unchecked. in all, the domestic economy seems to have adjusted well to the greater risks and challenges that have emerged. the pace of growth has moderated from last year ’ s but the overall growth momentum still looks firm and economic stability remains sound. the key issue going forward is the risk posed by the higher oil prices to the outlook on domestic growth and inflation. and under a more pessimistic scenario, an important question is how resilient is the domestic economy to absorb a much larger shock, this is to say persistently higher oil prices. in the meeting of the monetary policy committee last wednesday, members of the monetary policy committee spent considerable time discussing this type of questions based an preliminary analyses prepared by our staffs at the bank of thailand. while the numbers are still preliminary, the results seem to suggest a greater trade - off between growth and inflation going forward. in particular, higher oil prices will adversely affect both growth and inflation, but the effects on inflation is projected to be more pronounced because of the pent - up pressure on prices as mentioned earlier. reflecting this, the committee felt that the risks to economic stability have increased with higher oil prices and it is only proper that monetary policy should be vigilant on inflation. so, with the recovery momentum remaining firm but the risks to economic stability rising, the monetary policy committee saw less need for maintaining low interest rates and felt that the monetary policy stance should be adjusted to give priority to economic stability, with the adjustment being gradually paced. this is essentially the rationale behind the decision on wednesday by the monetary policy committee to raise the policy interest rate by 25 basis points. at this juncture, many of you may wonder whether higher oil prices together with higher

tarisa watanagase : dealing with volatile capital flows welcome address by dr tarisa watanagase, governor of the bank of thailand, at the 42nd seacen governors ’ conference, bangkok, 28 july 2007. * * * your excellency minister of finance, mr. rodrigo de rato, mr. herve hannoun, fellow governors, distinguished guests, ladies and gentlemen, i would like to begin by extending a very warm welcome to all of you to bangkok. we are pleased to host the 42nd seacen governors ’ conference and the 26th meeting of seacen board of governors here in bangkok. i would also like to express my sincere appreciation to his excellency chalongphob sussangkarn, finance minister of thailand, for his presence here to officially open the conference. this year ’ s theme on “ living with volatilities : is seacen prepared for rising fluctuations in exchange rate and capital flows? ” comes at an opportune moment, given a recent volatile and uncertain market conditions. this volatility has posed challenges to central banks in maintaining monetary and financial stability. let me share with you some of my views on this very important issue. it is traditionally believed that emerging markets are subject to more volatile capital flows than developed countries due to underdevelopment of our financial markets and weak institutions. thus, putting in place a more flexible exchange rate policy, credible monetary policy and sound domestic financial system could help emerging markets reduce the volatility of capital flows as well as its negative effect on the economic stability. the asian financial crisis in 1997 taught us a number of painful lessons from volatile capital flows associated with such weak institutions. since then, we have seen a large number of developing countries moving towards flexible exchange rate regime, adopting inflationtargeting framework, and improving the resilience of financial system. yet, the challenges from volatile capital flows have become more intensified and we still see the implications of volatile capital flows on our economies. we are, therefore, very fortunate to have with us mr. rodrigo de rato, managing director of the imf, and mr. herve hannoun, deputy general manager of the bis, to share their views and insight on this issue. i believe that we can greatly benefit from the imf ’ s new surveillance framework, which put greater emphasis on the volatile financial market, as well as from the bis expertise on analysis of capital flows during the morning session. i am certain that