prasarn trairatvorakul : thai economy – tapping the untapped opportunity speech by dr prasarn trairatvorakul, governor of the bank of thailand, at the inauguration of the rmb clearing bank in thailand and 5th year celebration of the icbc ( thai ), bangkok, 22 april 2015. * * * 1. your excellency ambassador ning fukui, chairman jiang, chairman hu, dr. zhigang li, distinguished guests, ladies and gentlemen, thank you for the invitation to give a few remarks on the occasion of the inauguration of icbc ( thai ) as the official renminbi clearing bank here in thailand. 2. this development of the rmb clearing bank in thailand and certainly also to celebrate the 5th anniversary of icbc ( thai ) is in fact the result of the long and continued ties between china and thailand. it has marked another important step in further development of our financial ties following the signing of the renminbi – thai baht bilateral swap agreement and the memorandum of understanding with the people ’ s bank of china on the establishment of the renminbi clearing arrangements in december 2014. 3. today, i was invited to talk about thai economy. so i am pleased to have the opportunity to share with you some of my observations on the current state of the thai economy. let me humbly start from some of the challenges we are facing, the economy is currently reeling from both internal and external headwinds. internally, the stagnant technology and labour readiness has so far taken a toll on thailand ’ s economic expansion. also, the improvement of domestic consumption and investment are slow due to a cautious private sector ’ s confidence. externally, thai economy is affected by the current uneven recovery of global economy which hinders thai export growth. however, thai economy is expected to recover up to 3. 8 % gdp growth this year from a mere 0. 8 % last year. private consumption and the government expenditures will play key roles for 2015 outlook. 4. on the bright side, thailand has been riding on the back of china ’ s economic prosperity. in other words, the regional prospect has pinned on improvement in intraregional trades of goods and services. china ’ s economic figures may be somewhat lower than its historical average, as a result of the sluggish recovery of the global demand and the continued structural reform in china. however, china growth rate is still at a satisfactorily high

inflation may breach the upper end of the band. as such, regaining poise by moving toward the neutral rate will allow us to pre - empt inflation risk. by now, you are probably wondering what the neutral rate is. let me comment briefly on this mysterious topic. first, on the concept – the monetary policy stance is normal or neutral if aggregate output is at its potential output and the monetary policy is not exerting any pressure on growth and inflation but simply promoting their stability. in practice, however, determining the neutral stance of monetary policy is not an exact science. the potential output alone is never observed with precision, as it depends on our labor force productivity, our competitiveness in the global market, our demographic structure, and the degree of distortions caused by public policies and other market failures, to name a few. uncertainties about these structural determinants make it difficult to ascertain precisely the output potential, and by implications, the neutral interest rate. finding the neutral rate would depend on incoming information about both the demand outlook and supply - side factors. that said, i would also add that real neutral rate should be in or close to positive territory. currently the real interest rate is negative. i have said that this year is the year of regaining poise, but regaining poise in an unbalanced world of fluid global liquidity is not easy. there may be more exchange rate volatility on the back of fluid flows. hence, the bank of thailand has pursued a managed floating exchange rate policy to lessen volatility. emerging markets in asia have pursued varying degrees of capital controls. on this point, let me say that my view is that capital control measures are options in our toolkit but they have to be appropriately designed. the trend has shifted from controlling capital towards more friendly pre - emptive prudential regulation to manage flow types rather than barring overall flows. on a related point, there has been talk that the current environment of fluid global liquidity has led to depressed long rates in asia, thereby complicating the conduct of monetary policy. this is indeed a possibility. however, capital inflows do not significantly weaken the interest rate tool of the bank of thailand. the bank of thailand focuses on short - term rates in conducting monetary policy as the thai economy is bank - based and most short and long - term loans have freefloating interest rates. i have discussed how monetary policy should be poised and pre - emptive