On May 1, 2008, the Ministry of Commerce released their latest inflation rate which was much higher than expected.
On a y-o-y basis, Headline CPI Inflation in April climbed to 6.2 percent - the highest level in more than two years (against the expected rate of 5.3 percent), up considerably over the record of 5.3 percent in March. Meanwhile, Core Inflation for April also edged up to 2.1 percent, which was the highest since mid-2006 (against 1.8 percent expected by the market), rising over 1.7 percent seen in March. The marked increase in the CPI for April came mainly from food and beverages, which soared 9.8 percent, YoY, especially on the prices of rice flour and cereal products (up 19.6 percent) as well as vegetables and fruits (rising 11.1 percent). Prices of other non-food and beverage categories also rose 3.9 percent, led by fuel prices (up 24.8 percent).
Looking ahead, some goods items and energy are likely to see their prices rise further (prices of sugar and related products, plus transportation costs and other goods that may be on the rise to reflect the increase in minimum wage rates). As a result, inflationary pressure will likely remain high over the remainder of this year. We at KASIKORN RESEARCH CENTER (KResearch) have therefore revised upward our projection on the inflation rate overall this year to 5.0-5.8 percent (with a mid-case at 5.4 percent). We also forecast that the MPC meetings over the remainder of this year will continue to put their priority on controlling inflation.
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In the meeting on April 29-30, 2008, the FOMC resolved to cut their policy rate by 0.25 percent to 2.00 percent – the seventh rate reduction since September 2007, as expected.
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However, the resolution was not unanimous, with 2 voting members wanting to hold the interest rate steady amid rising inflationary pressure. Meanwhile, the key focus was on the post-meeting statement where the content was changed. ;Downside risks in the US economy” were apparently not included in the statement. The Fed also cited that their seven rate reductions (totaling 3.25 percent) reflected ;the substantial easing of monetary policy”, believing that those moves coupled with other measures to tackle the liquidity crunch would help sustain US economic growth and minimize risks toward US economic activities in the following periods.
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The post-FOMC statement still indicated some Fed concern about the US economy. They cited weakness in private spending, financial market problems and the deepening housing contraction that would become major threats to the US economy. Given these, the Fed is expected to adopt a wait-and-see attitude before sending any clearer signal (of ending this easing cycle) to the market. Despite the US GDP in 1Q08 growing 0.6 percent (QoQ annualized) – higher than market expectation of 0.2 percent, growth in 2Q08 is likely to remain bleak. Meanwhile, movement in Interest rate futures (as of April 30, 2008) reflected that there was an almost 80 percent probability that the Fed might keep their key policy rate intact at the next meeting slated for June this year. However, before the FOMC meeting on April 29-30, the probability that the Fed would hold interest rate at the June meeting was nearly 100 percent. This reflects lower market confidence toward an unchanged rate.
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