fundamentals. what sets this recent episode apart is the pace with which the baht has appreciated. part of the appreciation could be interpreted as a ‘ catch - up ’ move, following a tepid period of last year when the baht underperformed many in the region. meanwhile, several currencies in the region were also subject to their domestic issues. in south korea, geopolitical factors resurfaced. in malaysia, a looming election curbed risk appetite until midmay. in indonesia, current account balance remains in deficit, for example. but even if one takes these factors into account, sharp movements in thai baht in march and april are still difficult to justify by fundamentals alone. our internal analysis has shown that the baht has, at times, deviated from its range of equilibrium or fair values. elements of selffulfilling prophecies were likely at work, encouraged by market speculation that the policy makers were adopting a hands - off approach regarding exchange rate. we welcome signs that the market has abandoned this misguided belief. the baht has been depreciating since late april, reducing the year - to - date appreciation against the dollar to about 3 percent. the correction is also evidence that under flexible exchange rate regime, unwarranted overshooting inevitably will be corrected by market forces. the fact is that although the exchange rate is not the bot ’ s main policy tool, or an intermediate policy target, it is an integral part of our macroeconomic analysis and policy deliberation. beyond aggregate statistics, it is also recognized that sharp exchange rate volatility can have significant impact on small businesses with less capacity to adjust. thus, while exchange rate is allowed to play an active automatic stabilizing role under current framework, the mpc constantly monitors the impact of baht movements on the overall economy. to supplement this baseline analysis, the bot staff also conducts projections under different degrees of baht appreciation. in a recent joint forecast exercise with the ministry of finance and the office of the national economic and social development board ( nesdb ), the bot ’ s estimate of growth impact of baht appreciation in fact proved to be the largest among the three, testifying to our conservatism. in broad terms, however, the three agencies ’ analyses agree that baht appreciation alone should not derail the underlying momentum of the economy. bis central bankers ’ speeches the mpc continues to be prudent, and vigil

finance. in fact, if anything, a high pace of credit growth may have raised risks of overheating in some sectors, with potential implications for financial stability. the monetary policy committee ( mpc ) has flagged this risk several times since last year, and will continue to monitor the situation closely. on the other hand, there remains an important drag to growth, largely stemming from a protracted global recovery. in some parts of asia, the first quarter growth has turned out to be lower than expected, as a result of slowing global trade. in thailand, q1 growth has similarly been subdued, expanding 5. 3 percent as both private consumption and investment moderated. part of this pullback may have been a natural reversion to a lower pace of growth after an unusually strong expansion last year. lingering uncertainty about global demand bis central bankers ’ speeches may have also caused some export firms to delay planned investment. consumption may have been held back by farm income in the midst of low global commodity prices, and an accumulation of household debt, which is now at 78 percent of gdp. set against this weaker - than - expected domestic demand, is relatively resilient exports which expanded more than 8 percent. given the still weak global demand on the one hand, and already easy financial conditions on the other, monetary policy must carefully weigh the merits of providing growth support against financial stability concerns. policy interest rate is not the only available tool to address these multiple objectives. macroprudential measures, in particular, are also part of the policy tool kit. the mpc will continue to exercise its best collective judgement as to what course of action and policy mix are deemed most appropriate to ensure maximum sustainable growth for the thai economy. challenges from capital flows and exchange rate volatility let me now turn my discussion to a topic that has attracted a lot of attention recently, namely the issue of capital flows and exchange rate. the appreciation of the thai baht this year up to late april has raised some concerns. during this period, the baht strengthened nearly 7 percent against the us dollar, and 10 percent against our trading partners ’ currencies. what has caused such movement in thai baht? there is little disagreement that, over a long period of time, exchange rates tend to appreciate in economies with better growth prospects, strong external balances and overall sound fundamentals. over the past decade, currencies in thailand and other parts of asia have followed gradual appreciation trends, broadly consistent with their respective