The Bank of Thailand is keeping a close eye on the the spill-over effects from unconventional monetary policies in advanced economies on emerging markets, while the European Central Bank is still pursuing aggressive monetary easing to defeat uncomfortably
Compared to the United States, the “size and scale [of the spill-over effects from Europe] are not as big and the structure of the financial system in the eurozone is more bank- based rather than market-based,” Prasarn Trairatvorakul, governor of the Thai central bank, said on Saturday.
Prasarn was speaking at a press conference after the seventh Executives’ Meeting of East-Asia Pacific Central Banks and Eurosystem High-Level Policy Dialogue.
It was hosted by the Thai central bank and the European Central Bank (ECB).
More capital has been injected into the global financial market by the US central bank, so the repercussions of changes in its unconventional monetary policies on emerging markets tends to be more severe.
Since 80 per cent of the eurozone’s financial injections pass through intermediaries like commercial banks rather than capital markets, there are more instruments – such as macro-prudential measures – that can be regulated and used to control spill-over effects from such policies, Prasarn said.
Even though the spill-over effects from the eurozone are minimal and the current ECB easing measure has counterbalanced the European commercial banks’ problem of liquidity, developing economies such as Thailand should be vigilant.
“There are possible unknowns and we should not be complacent, such as risks that occur from sources that are unexpected in the beginning like part of the financial system that has not been regulated and geopolitical risks, so it is best for authorities to be on the cautious side and be prepared for the unknown risks,” he said.
Vitor Constancio, vice president of the ECB, said the current ECB measures aimed at boosting inflation that is sitting “too low” and far from its target of 2 per cent annually will be maintained for the time being.
Additional measures are unlikely to be taken if the measures introduced last month are as effective as they are hoped to be.
“The situation we have now in Europe is very low inflation in goods and services. The last two readings of headline inflation in Europe have been 0.5 per cent year on year, which is far below the definition of price stability that we have in our mandate, which is to keep inflation below but close to 2 per cent,” he said.
“With such low inflation, we have to conduct monetary policy in order to try to foster an economic environment that will bring inflation closer to our target and that implies a low interest rate,” he said.
The ECB is “convinced” that the June measures, including aspects that operate via interest rate and credit channels, will be effective against low inflation, but it will have to take a ‘wait and see’ stance on how the commercial banks will use the initial allowance of the new liquidity facilities and what will be the development in credit revisions to the economy.
“Up to now ... we saw that the overnight rate went down and it has been very low, as it was to be expected. We also see more activities in the interbank market, as expected as the result of negative depository rates that we now have.
“So the initial effects are in accord with what we have expected, but the impact from the targeted loans is still to come,” Constancio said.
As for a possible disruption in asset prices that can be brought on by the low-rate policy, the ECB will implement new regulatory measures that can deal with the possible imbalances in the asset market.
“Since the approval of the single monetary mechanism, which will start operating next November, we will have the instrument of macro-prudential policy at our disposal and that’s the type of measures that are more compatible and effective to deal with imbalances in asset markets,” he said.