On the second issue, financial imbalances may foment under the radar and are difficult to detect. Granted, I have said that monetary policy should be perceptive. But as you all know there are limits to the far-sightedness of economists or central bankers as the global financial crisis so painfully showed. To paraphrase Mark Twain: “it’s not what you know, but what you don’t know that gets you.” Hence it would be wise to prepare for the worse by building resiliency from within. A framework for macroprudential policy is needed. Let me remind you that The Bank of Thailand’s mandate covers both monetary and financial stability. Monetary policy focuses primarily on price stability. Macroprudential policy should focus on financial stability. We therefore see no conflict between joint use of macroprudential and interest rate instruments as they primarily serve different objectives. Prudential measures constitute the first line of defense against financial imbalances by serving as “sand in the wheel”, so as to dampen the financial cycle, weaken procyclicality, and hence reduce the propagation of financial shocks. The interest rate tool, in comparison, is too blunt. However, as the last line of defense, monetary policy can be used to lean against the winds of excessive asset prices. The prudential measure we announced last year – a loan-to-value limit of 90 percent for condominium purchases – is an example. The measure in itself is not particularly binding; it is more significant as a pre-emptive move designed to signal policy resolve in mitigating possible build-up of real estate bubbles.
The current surge in oil and commodity prices also poses a challenge to global growth, though, we expect the supply shock to have a limited impact due to several reasons: first, increased oil resiliency, second, real oil prices are still lower than its peak in 2008 and third, many emerging markets administer prices to cushion the blow. There is a downside risk that this environment of global liquidity amid uneven recovery and geopolitical risk in the Middle East may threaten global growth and stability. This scenario has a low probability of happening. Nevertheless, we should be mindful of it. In this scenario, oil prices will surge upward again and remain high due to strong demand from emerging markets, partly fueled by global liquidity, and supply constraints arising from adverse weather and widespread and protracted unrest in the Middle East. Global recession may result; or worse, global stagflation. The outcome depends on how US and Euro policy makers will respond. US and European monetary policymakers are therefore between a rock and a hard place of balancing structural risks to growth and new risks to inflation. If US or Euro recovery is still fragile, policymakers may choose to keep interest rates low, prompting stagflation further down the road. The US and Euro policymakers are therefore in a race against time. Their economic stimulus packages must revitalize the economy before the negative side-effects return home to derail the recovery. In such a world, what can the Bank of Thailand do?