This is the so-called price channel. In particular, markets generally consider that the credit standing of a sovereign has direct implications for the creditworthiness of most private institutions within the jurisdiction of the sovereign itself. Thus, sovereign yields provide generally a floor to the funding conditions of the private sector. To the extent to which abrupt movements in yields carry the risk of spiralling off and leading to contagion, credit intermediation suffers and there is an impairment in the transmission of monetary policy. Second, government bonds usually provide a primary source of collateral, given that they are generally the most liquid asset class. This makes government bonds a prominent type of collateral in repurchase agreements. The disruption of sovereign debt markets hampers the functioning of the interbank repo market and reduces its liquidity. This leads to increased money market rates due to premia for liquidity risk, with an impact on the capacity of banks to provide credit to the real economy. This is the socalled liquidity channel. Third, changes in the valuation of bonds affect the behaviour of the financial and non-financial sectors via their impact on the strength of their balance sheet – this is the so-called balance sheet channel. For lenders, the lower capital base may mean that they can supply fewer loans to the economy. By contrast, borrowers see their creditworthiness reduced. This in turn limits their capacity to borrow.
Thus, emerging market central banks must be prepared for policy contingencies ahead. At the core, monetary policy must continue to safeguard price stability, while taking into account concerns about economic growth and financial stability. The Bank of Thailand, on our part, will do our best to steer the Thai economy and financial system through the global turbulences, to ensure the continued well-being of the Thai people in years ahead. Thank you. BIS central bankers’ speeches  1