Headline Inflation in November 2009 posted growth for the second consecutive month, rising 1.9 percent YoY, against 0.4 percent growth in October. The Headline Consumer Price Index (Headline CPI) rose 0.3 percent MoM, higher than the market expectation due to increases in the prices of fuel and some foods, such as rice and meat. The Core Consumer Price Index (Core CPI) for November remained unchanged over-month (MoM), but rose 0.1 percent YoY. Although Headline Inflation showed the first growth in seven months, it was still not within the BOT's inflation targeting framework of 0.5-3.0 percent for the seventh consecutive month.
KASIKORN RESEARCH CENTER (KResearch) expects that despite product prices in December remaining unchanged MoM, Headline Inflation will likely surge to 3.6 percent YoY due to a low base effect from last year. As a result, Headline Inflation in 4Q09 will likely show growth of around 1.9 percent YoY and the average Headline Inflation figure overall for 2009 will likely be in contraction at (-)0.8 percent, improving over the former projection of (-)0.9 because the inflation rate in November rose higher than expected. However, it is expected that Core Inflation will likely remain low, with an average of 0.3 percent for this entire year.
On the outlook for 2010, it is expected that inflationary pressure will increase due to an upward trend in farm produce prices in line with lower production by the world's major suppliers. Although crude oil and other commodity prices currently remain unchanged due to some anxiety toward the US economic recovery and stability among newly emerging economies, as well as Vietnam's devaluation of their currency and Dubai World's call for a six-month delayed payment on debts, commodity prices will likely accelerate after the global economy signals a clearer recovery.
Due to investors' general belief that there will be higher demand for commodities later on and their desire to invest in higher return assets amid the USD depreciation, KResearch expects that the Headline Inflation figure in 2010 may rise to at least 3.0 percent. If oil and farm produce prices surge sharply and the government does not extend their cost-of-living relief measures, inflation will likely reach 5.0 percent, against the contraction of (-)0.8 percent in 2009. Meanwhile, the Core Inflation rate is expected to increase 1.5-2.5 percent, against the projected 0.3 percent for 2009.
An important policy issue that should be monitored in the near-term would be the government's extension of five measures to curb the cost of living,which are scheduled to end on December 31, 2009. KResearch views that the government should gradually withdraw these measures to avoid a steep surge in inflation.
On the impact of the inflation rate toward monetary policy, KResearch views that although Headline Inflation will likely surge higher than 0.3 percent in 1H10, weakening demand will keep Core Inflation low. It is expected that the average Core Inflation rate will not exceed 1.5 percent in 1H10, moving to within the BOT's inflation targeting framework of 0.5-3.0 percent.
Hence, the BOT will be able to continue their low interest rate policy to sustain the national economic recovery. The Thai key policy rate will likely be around 1.25 percent in 1H10. On the other hand, it will likely adjust higher in 2H10. The timing and magnitude of policy rate increases will likely depend on the domestic inflation rate trend and other factors, such as economic growth and the interest rate trends in other countries.
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