Bandid Nijathaworn: Macroprudential policies and capital flows – managing under the new globalization Remarks by Mr Bandid Nijathaworn, Deputy Governor of the Bank of Thailand, at the Conference on Macroprudential Policies, organised by the People’s Bank of China (PBC) and the International Monetary Fond (IMF), Shanghai, 18 October 2010. *  *  *  Thank you Chair, First, let me thank the PBC and the IMF for the invitation. It is an honour to be here, and to be given the opportunity to share my view on this panel. Given time limitations, and the fact that capital flows are important developments in the region at this time, I want to use this opportunity to discuss three issues. The first is the context of the current capital flows to Asia. The second is managing capital inflows and the role of macroprudential policies, where I will draw on Thailand’s recent experience. And the third is my view on what we need to do to deal more effectively with the capital flows challenge. At this time, capital inflows to Asian emerging markets have been large and persistent, posing challenges for policy. The first challenge involves a macroeconomic dilemma that centres around the tension between appreciation pressures, inflation development, and growth prospect. The second stems from financial stability concerns associated with potential build-ups of macroeconomic imbalance, risk of asset price bubbles, and the possibility of an abrupt reversal of inflows.
In the absence of negative shocks, that normally tends to  3  BIS Review 108/1999  generate GDP growth above the rate that is sustainable in the longer run. If such a situation is left to continue for too long, various bottleneck problems arise that may push inflation up. Such a course of events has to be prevented by the Riksbank, which the Riksdag (Sweden’s parliament) has made accountable for maintaining price stability. So in order to counter an acceleration of inflation in an upward cyclical phase, sooner or later the level of the repo rate has to be normalised. It is generally true to say that a repo rate increase should not be postponed unduly. If a central bank waits too long, the increase has to be larger in order to arrest the overheating and inflationary tendencies. That would run the risk of the next slowdown being deeper and more severe than otherwise. A higher repo rate does not necessarily impede the continuation of a favourable economic trend; it may even be required for a good and sustained development of employment and growth, as is illustrated by how the Federal Reserve has acted in the United States. This shows what a forward-looking monetary policy can do for sustained growth. The formulation of monetary policy in the United States, with timely restrictive measures, has contributed to the American economy now being in its longest post-war period of growth.