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3 Aug 2009

Thai Economy

July Inflation Down more than Expected, Likely Lowest Point (Business Brief No.2582)

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The inflation rate released recently by the Ministry of Commerce showed that Headline Inflation fell 4.4 percent YoY in July 2009, contracting more than the 4.0 percent drop in June. This was lower than forecast by many analysts and represents 7 months of continuous contraction. Meanwhile, Core Inflation fell 1.2 percent YoY in July, contracting even more than the 1.0 percent contraction in June. Core Inflation has thus shifted outside the Bank of Thailand's inflation targeting range of 0.0-3.5 percent for the third consecutive month. Overall in 7M09, Headline Inflation fell 1.9 percent, while Core Inflation rose 0.5 percent YoY.
The worse-than-expected inflation and the government's five cost of living relief measures that will end in December 2009 lead KASIKORN RESEARCH CENTER (KResearch) to view that the relatively inert product prices will result in Headline Inflation to continue contracting over the entirety of 3Q09, but at a slower pace than before. Inflation may be seen returning to an upward trend in 4Q09, though. The current gradual contractions being seen are mostly the result of a base effect YoY when inflation has only just started to cool in line with overall commodity prices. Moving forward from now, however, higher global oil prices and commodity prices will likely increase prices of other consumer goods, as well.
KResearch expects that the average inflation rate in 3Q09 will show a decelerating contraction of 2.1-2.3 percent YoY, against the contraction of 2.8 percent in 2Q09. Due to the long-term contraction experienced over three consecutive quarters this year, Headline Inflation for 2009 will also likely be in contraction. We, thus, have changed our projection on Headline Inflation in 2009 to -0.4 to -0.9 percent YoY, against our previous projection of -0.5 to +0.5 percent, and have also reduced our projection on Core Inflation to 0.0-0.5 percent, against the previous projection of 0.4-0.9 percent.
As for the significance of this trend toward the authorities' policy implementations, KResearch views that it will not affect the direction of BOT policies over the remainder of 2009. Although Headline Inflation will post a deep contraction and the Core Inflation will deviate from the BOT's inflation targeting framework, they view that this is largely due to the government relief measures to reduce cost of living expenses and is therefore not a signal toward deflation.

It is also expected that the inflation rate may increase gradually over the near-term. As a result, the probability that the BOT will reduce their policy rate right now is low. Low inflation will facilitate the BOT in maintaining their policy rate for the rest of this year. However, pressure on inflation rates will increase in 2010 and likely further complicate BOT policies to preserve all goals simultaneously, e.g., price stability, economic growth and the monitoring of the currency exchange rates to prevent any effects on the export sector.

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Thai Economy