Due to the fact that overall consumer prices, particularly food prices, in July 2010 showed slower MoM growth and energy prices increased only slightly during the month, Headline Inflation in July 2010 increased only 3.4 percent, lower than the forecasts of most analysts. However, an upward direction continued in Core Inflation. Then, the gradual increase in Core Inflation to 1.2 percent was seen as expected.
KResearch expects that a high base effect may result in decelerating increases in the inflation rate during coming months and help maintain an average Headline Inflation rate in 3Q10, nearing to that in 2Q10. Nevertheless, it is expected that over-month increases in overall product prices, including food and energy, will continue in 3Q10. This will lead to increases in Headline Inflation around the year-end.
For Core Inflation over the remainder of this year, it may differ slightly from the trend in Headline Inflation. It is expected that Core Inflation will likely gradually increase to 1.5 percent YoY by the end of 3Q10, and to 2.0 percent YoY by the end of 2010.
Although the government has asked the private sector to maintain product prices and has extended cost-of-living relief measures (including energy-related controls) for another six months, there are many factors supporting higher overall product prices, particularly food over the remainder of this year due to climate changes and the ‘Kin Jae' festival in early 4Q10. Meanwhile, energy prices may rise in line with the global market oil price trend. Inflationary pressure will likely increase at the end of 2010 and may accelerate in early 2011. This would then become an important factor inducing the BOT to increase their key policy rate, following their initial tightening in monetary policy at their meeting in July.
KASIKORNBANKGROUP believes that policy rate may increase to the level of around 2.0 percent by the end of 2010. However, it is expected that the authorities will carefully introduce such policy moves only after estimating any risk of a global economic deceleration that may affect the Thai economy.
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