On the economic side, uncertainties heightened because of both external and internal factors. The impending threat of global imbalance became even more pronounced. The dwindling confidence in the US dollar continued, which brought about massive capital inflows into the region, resulting in an across-the-board currency appreciation. At the same time, rising oil prices continued to put pressure on inflation during the first half of 2006. Consumer and investor confidence, meanwhile, was clouded by lingering political uncertainties that brought about delays in consumption and investment decisions, as well as in government spending. As domestic demand weakened, export became the main driver of the Thai economic growth. Despite the negative environment, the overall economic performance was quite satisfactory. The economy proved to be resilient, as the growth momentum continued while overall economic stability improved. Regarding internal stability, headline inflation came down from a peak of 6 percent in the second quarter of 2006 to 3.3 percent in the last quarter and to 2.3 percent in February this year. Core inflation fell from its peak of 2.9 percent in April 2006 to 1.4 percent in February – well within our target range. Overall external stability remained sound. The current account turned into surplus since August and registered a surplus of 1.2 billion US dollars in December 2006, or an overall surplus of 1.5 percent of GDP for the year 2006. Meanwhile, reserves to short-term debt also rose further.
[Chart: December 2008: Market rates shifted down markedly after policy announcement] As shown by the black line in this chart, we cut the key policy rate substantially at the monetary policy meeting in December 2008. The dashed blue line, which shows the market path the day before we announced the rate cut, indicates that a significant cut was anticipated by the market. However, in addition to cutting the policy rate, we also published a new interest rate forecast, shown by the solid purple line, which was considerably lower than our previous forecast, shown by the dashed purple line. The market had not fully anticipated this, and forward rates shifted down markedly after the meeting, as indicated by the solid blue line. The interpretation could be that we provided news to the market about the strength of the action deemed necessary by Norges Bank as a response to the financial crisis. On this special occasion, when uncertainty was larger than usual, we believe that publishing the interest rate forecast was particularly helpful in making monetary policy more effective. This example suggests that we can indeed guide the market and affect expectations. [Chart: Interest rate expectations one year ahead] Further evidence supporting our ability to affect expectations comes from household survey data. In this chart, the purple line shows a diffusion index of households’ bank rate expectations one year ahead.