This is because the flexible exchange rate would make the risk of foreign currency denominated borrowing by banks and firms explicit. This would help discourage the incurrence, and accumulation, of un-hedged foreign currency liabilities. Indeed, the low volatility of exchange rates also leads economic agents to believe that the authorities are insuring them against the exchange rate risks.
Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted. Turning first to the economic analysis, the latest indicators and survey data confirm that the expansion of economic activity continued in the first quarter of 2007 and remains solid and broadbased.