A report on inflation data released by the Ministry of Commerce showed that headline inflation slowed to 3.4 percent YoY in March 2010, from 3.7 percent in February. This tamer inflation could be attributed in part to moderate increases in product prices over-month, and a high base comparison from last year. Meanwhile, Core Inflation (excluding food and energy prices) in March was slightly higher at 0.4 percent YoY, from 0.2 percent in February, still lower than the lower bound of the inflation targeting range of 0.5-3.0 percent set by the Bank of Thailand (BOT). Overall, Headline Inflation and Core Inflation in 1Q10 averaged 3.8 percent and 0.4 percent, respectively.
KASIKORN RESEARCH CENTER (KResearch) forecasts that Headline Inflation may continue to ease in April due to the relatively high base effect of 2009. At the same time, Core Inflation should remain moderate, even though it may advance to be within the BOT inflation targeting framework, or slightly higher than 0.5 percent. This means that inflationary pressure will remain subdued over the next one or two months. Nonetheless, inflationary pressure may accelerate during 2H10. The factors that will affect inflation trend are hikes in global crude oil and other commodity prices; domestic farm produce prices; the government's price controls, as well as relief measures for low-income earners via utility and energy price subsidies.
We thus maintain our projection for 2010 Headline Inflation in a range of 3.0-4.0 percent, but we are narrowing our Core Inflation projection to 1.5-2.0 percent, versus our previous estimate of1.5-2.5 percent. This slightly downward revision in the upper bound stems largely from domestic political risk that may affect consumer spending and prevent producers from significantly raising product prices. The extended government assistance measures for low-income earners are another factor.
Amid benign inflationary pressure over the short-term, KResearch holds the view that inflation alone is unlikely to be a major influence on the economy or government policies during 1H10. Other factors will need to be taken into account when it comes to the setting of policies, especially monetary policy. Better than expected economic performance, as seen in the latest economic data for 2M10, has leaned many government economic agencies – as well as KResearch – toward greater optimism about the 2010 economic outlook. However, there is a consensus that the political situation will remain a key risk factor that needs further attention. Political uncertainty may defer the government's decisions on an ‘exit strategy' from their economic stimulus packages. Nonetheless, inflation will likely accelerate during 2H10, which would inevitably lead to an upward trend in interest rates.
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