Kajorn Thanapase
Senior Economist
Monetary Policy Group
SINCE LATE 2008, the unprecedented measures taken by the central bank and the government - the two stimulus packages - and the speed at which they were introduced and implemented have allowed the country to avoid an otherwise more formidable downturn.
Against the backdrop of the global economy suffering a severe and synchronised downturn, the Monetary Policy Committee (MPC) in four straight meetings lowered the policy interest rate by a cumulative 2.5 percentage points to a historic low of 1.25 per cent, starting with a 100-basis-point cut in December 2008.
These substantial and swift rate cuts were designed to alleviate financial burdens on firms and households with the aim to mitigate non-performing loan risks.
The cuts were also expected to shore up business and consumer confidence, which in turn would help cushion the economy against severe external shocks of an unknown magnitude.
Recent economic data point towards a continued recovery of the economy. After contracting in December 2008, the export sector expanded 26.2 per cent in December 2009.
The same trend could also be witnessed in production and private consumption.
Capacity utilisation and the Business Sentiment Index compiled by the Bank of Thailand also rose from 57.3 and 36.9 in December 2008 to 70.1 and 50.4 in December 2009.
Since the economy has started to exhibit stronger signs of recovery, one may question how much longer Thailand needs this extraordinary level of monetary stimulus.
Policymakers are facing this challenge: How to tailor a "gradual normalisation" of their policy stance at an "appropriate pace" and within an "appropriate timeframe" to ensure that monetary policy will not act as a deterrent to the ongoing economic recovery.
A number of issues are of particular importance given the current economic outlook.
On the one hand, a premature policy rate hike could risk choking off the still fragile recovery, while on the other hand a prolonged delay in rate normalisation could lead to rising inflation and/or asset price bubbles.
The policy challenge is analogous to "withdrawing medicine" in a timely manner so that the patient can continue to recover, while at the same time minimising the risks of addiction and dependency. Going forward, a key objective of monetary policy in 2010 is to help foster a sustained economic recovery while maintaining priced and financial stability.
Accomplishing these dual goals will call for a careful assessment of the strength of the economic recovery, potential financial imbalances and inflationary risks so that the calibration of monetary policy will be well timed.
In so doing, the shaping of monetary policy will be guided by three underlying principles - it must be consistent with the ultimate objective of long-term price stability, supportive of the economic recovery, which is still at an early stage, and attentive to the potential side effects in terms of creating imbalances in the economy. Applying the three principle to actual policy implementation is undoubtedly the top priority of policymakers in 2010.
(The views expressed are the author’s own.) Published in The Nation on Monday, February 08, 2010 Source: Bank of Thailand