Despite a sharp decline in domestic retail oil prices in June 2010, the inflation rate released by the Ministry of Commerce on July 1, 2010, reflected continued increases in goods prices from early this year, especially food prices that have been hit drastically by drought.
Looking forward, KASIKORN RESEARCH CENTER (KResearch) holds the view that the inflation rate in 2H10 may continue to stay high, or even stretch higher than the level in 2Q10, even though the extension of cost-of-living relief measures for low-income earners and the freezing of LPG and NGV prices for another six months will have a dampening effect on the rising inflation rate over the remainder of this year. Headline Inflation is expected to average in a range of 3.3-3.7 percent, while Core Inflation may gradually edge higher to around 2.0 percent in 4Q10.
KResearch forecasts that amid gradual increases in inflation, the Core Inflation rate, in particular, may exceed the BOT key policy rate in 3Q10. Meanwhile, political risk having subsided since mid-May 2010 may be favorable to changes in the Bank of Thailand (BOT)'s ultra-easing monetary policy stance – wherein their policy rate now stands at 1.25 percent – to a tighter direction in order to maintain the Thai economic stability. Such a move would be in line with the tightening trends adopted by most central banks in the Asian region amid increasing inflationary pressure and risks of asset bubbles.
Close attention should be paid to the next two Monetary Policy Committee meetings (slated for July 14 and August 25, 2010) when it is highly likely to see the start of an upward trend in the Thai policy rate.
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