Distinguished Guests, Another major risk to the inflation outlook is a sharper than expected slowdown in global economic activity, which, in turn, could lead to further volatility in financial markets. The eventual impact of financial turmoil on global economic activity triggered by mortgage loans in the US economy is yet to be seen. These uncertainties have been dampening the risk appetite and thus slowing capital flows to emerging economies. The CBT will not react to temporary fluctuations in financial markets. Yet, we will not hesitate to tighten monetary policy in case of a significant worsening in the overall pricing behavior. Under current liquidity conditions, I believe it is useful to note that the Central Bank has the resilience to implement a strong monetary tightening within a short time. The recent cuts in the amount of foreign exchange auctions, reduced FX borrowing of the Treasury and the increase in demand for money has led to a decline in the withdrawal of excess liquidity in the overnight market. The said tendency is expected to persist in the upcoming period, which will thus lead to relatively tighter monetary conditions. This framework not only allows the Central Bank to perform more resilient and efficient liquidity management but also to adopt tighter monetary policy without the need for a Monetary Policy Committee Meeting.
The annual growth rate of loans to non-financial corporations, by contrast, fell from its recent peak of almost 15% in April 2008 to 0.7% in August 2009 (see Chart 6). It should be noted that these figures cover all non-financial corporations, small, medium-sized and large, and do not provide a breakdown of the data by size of firm. In the case of non-financial corporations, the moderation in lending has thus continued, a fact which has raised some concerns among market observers that companies, and SMEs in particular, may be suffering from a true “credit crunch”. Against the background of these concerns, it is important to make a number of observations. First, looking ahead it is likely that loans to enterprises may moderate further before starting to recover. This would also be in line with past evidence, which indicates that the growth of loans to non-financial corporations tends to lag GDP growth by about three quarters. This may be related to the fact that non-financial corporations usually see their cash flows improve early in an economic upturn and thus tend to finance working capital and fixed investment with internal funds first, and only later with external financing. Given the current projections of a stabilisation in economic activity in the second half of this year, a turningpoint in loan growth may not be reached before early 2010. Second, recent credit developments appear to be fully in line with past historical regularities, once we take into account the severity and duration of the recession.