If households and businesses respond to low inflation outcomes by reducing their expectations for future inflation, and wages and prices are set accordingly, then these lower inflation expectations would weigh on future actual inflation over the horizon relevant for monetary policy. We carefully monitor developments in inflation expectations, at various horizons.
One can readily understand that the purchase of unhedged short-term dollar liabilities to be invested in Thai baht domestic loans would at some point trigger a halt in lending by Thailand’s banks if the dollar exchange rate did not hold. But why did the economy need to collapse when lending did?