According to the Ministry of Commerce's February Consumer Price Index (CPI) report, Headline Inflation stood at (-)0.50 percent YoY, becoming less negative than the (-)0.53 percent YoY pace reported for January. This was consistent with Core Inflation (excluding raw foods and energy prices) that rose to 0.68 percent growth YoY in February, versus the 0.59 percent YoY in January. This implies that inflation here is on the rise (i.e., Headline Inflation that became less negative). As a result, we at KResearch believe that Headline Inflation may inch upward into positive territory around mid-2016, and this may take some pressure off the BOT towards continuing its accommodative monetary policy stance.
Headline Inflation came in at (-)0.50 percent YoY for February, being at the least negative spot in one year, due perhaps to 1) a high February 2015 base when bus and taxi fares were hiked; and 2) rising consumer product prices during February 2016, e.g., cigarette prices rose by THB5-10/pack after tobacco duty stamp tax rates were hiked. Raw food prices, e.g.,fruit/vegetables and eggs, also rose, given the Chinese New Year and erratic weather conditions.
With regard to the 2016 inflation outlook, stubbornly low crude oil prices in 1H16 and their slow recovery expected in 2H16 since attempts by oil producers to lower production may fail to reduce the supply glut, lead KResearch to forecast that an average Dubai crude oil price may fall below our previous projection to USD40/barrel. Given this, we have revised downward our 2016 Headline Inflation forecast to 0.4 percent, or between 0.0-0.8 percent, from 1.2 percent before.
As for the effect of inflation on the BOT's monetary policy, KResearch believes that inflation here has finally bottomed out from the low of (-)1.27 percent recorded in May 2015 and should become less negative thereafter. As a result, we expect that Headline Inflation should inch up into a positive reading around mid-2016 or early 2H16, while Core Inflation may trend higher to 1.0 percent YoY by that time, too. We expect that an average inflation rate should then climb to a year-high during 4Q16.
However, since that inflation uptick would be caused chiefly by a low 2015 base, we are of the view that this would not constitute an impediment to the BOT vis-à-vis continuing its accommodative monetary policy stance in 2016. It is expected that the central bank will place more weight on maintaining economic recovery momentum (that remains hindered by weak exports and private spending), as being pursued by other central banks that have signaled new rounds of monetary easing to cope with the persistently weak global economy.
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