Lower domestic interest rates could help cushion the economy from the heavier impacts of the global downturn next year, as local inflationary pressure is likely to decline, says Prasarn Trairatvorakul, the Bank of Thailand governor.
The Asian Development Bank and the World Bank both cut their growth outlook for the world and Asian economies next year, so Dr Prasarn said the Monetary Policy Committee (MPC) could be looking for the right time to cut interest rates to bolster the economy.
"I think inflationary pressure is likely to decline next year, so monetary policy could be more flexible in terms of timing and using tools to cushion the economy," he said in a speech to the central bank's Songkhla office.
Central bank staff have conducted business surveys in provincial areas to assess the economy. Dr Prasarn said the MPC needed to consider various scenarios for the world economy and the banking system to determine the right time to make a move.
"In addition to envisioning abnormal economic signals and assessing tail events associated with the world economic downturn, the central bank's economic teams also need to discuss with the financial institution team any moves so they take into account financial institutions' stability," he said.
Dr Prasarn said the central bank stood ready to introduce macroprudential measures to address economic vulnerability such as implementation of a loan-to-value ratio for mortgage loans to prevent a property bubble, a move it took in the past.
He said the euro-zone sovereign debt crisis could intensify next year amid the backdrop of an economic recession. Meanwhile Asian economies have begun to show signs of deceleration, notably China.
Liquidity injections from Western central banks could be of little help in promoting growth, suggesting more sluggish world economic growth next year.
Sutapa Amornvivat, the chief economist at Siam Commercial Bank, said economists expected a long stagnation period for advanced economies, but the slowdown in emerging markets such as China is a relatively new factor.
"In this situation, quick-fix measures by the government are allowed. But it should send a clear signal if measures that will affect the industrial structure such as the first-car rebate and rice pledging will last for the long term," said Dr Sutapa.
She said the euro-zone crisis has provoked central banks to take on a new role a risk taker to recapitalise non-bank lenders instead of acting as the lender of last resort, given the massive overhanging debt in advanced economies.
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- Writer: Parista Yuthamanop