CPI inflation remains subdued at a rate of 0.4 percent year on year in October, reflecting the sizable output gap and well-anchored inflation expectations. On the financial stability front, the banking sector remains resilient with healthy balance sheets and the lending capacity largely preserved. And notwithstanding the strong resurgence of capital flows, the risk of asset price bubble, either in equity or in housing, for now remains low given the slow growth of bank credit and the more subdued initial conditions. The situation on asset prices, however, warrants a close monitoring as credit conditions can change quickly given the ample domestic liquidity. In sum, the Thai economy is now in a process of recovery. The economy is poised to return to positive growth next year. At this time, however, the momentum of private sector demand is still not robust with the momentum largely mirroring the support from policy. Economic and financial stability, on the other hand, is intact with subdued inflation and a resilient banking sector. Therefore, given weak private sector demand, the Monetary Policy Committee is of the view that policy support remains needed as a firm recovery is yet to be established. It was in this context that the policy interest rate was kept unchanged at 1.25 percent in the last Monetary Policy Committee meeting in October. Next, let me share with you our assessment of the outlook for the economy and policy.
It seeks to provide banks with stronger incentives to employ the most advanced techniques to calculate risk exposures and, hence, to push risk-management towards the best available practices. Specifically, Basel II makes these general principles operative by building on three complementary pillars. The first pillar is intended to achieve a more precise and sensitive mapping between banks’ actual risks and the minimum regulatory capital requirements. Under the new framework, banks are allowed and, indeed, encouraged to rely on their own measures of certain risk parameters, thus fostering a wider usage of the best available techniques and tools for that purpose. The Committee firmly believes that a better alignment between regulatory and economic capital is conducive to a more efficient allocation of credit and a less distortionary regulatory system. The framework is also extended to operational risks, which have proved to be more relevant in an increasingly complex world that demands highly sophisticated processes. The second pillar, supervisory review, requires banks to assess their own capital needs for their overall risk profiles, including whether any activities or exposures may incorporate more risk – and hence may require more capital – than is assumed in Pillar 1. Supervisors, in turn, must evaluate the banks’ assessments and processes, and respond if these are not appropriate.