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4 Jan 2017

Thai Economy

2017 Inflation to Average 1.8% on Rising Oil Prices (Business Brief No.3655)

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Headline Inflation averaged a low of 0.2 percent in 2016, but the last two months witnessed an uptrend in line with rising global crude oil prices. Given this, it is possible that we will see higher inflation in 2017, also on improved global oil prices. KResearch projects that Dubai crude oil prices will perhaps reach USD50/barrel or more, up from an average of USD41.3/barrel in 2016, thanks to a deal reached between oil-exporting countries – both OPEC and non-OPEC members – to cut production. Higher oil prices would here be a major impetus for driving Headline Inflation up to an average of 1.8 percent, p.a. As oil prices rise, higher production costs will likely be passed on to the retail prices of goods and services. Thus, Core Inflation would edge higher, wherein we estimate that it will reach 1.2 percent, p.a.

As often as not, higher inflation would diminish consumers' purchasing power, which is already limited. This will also be a pointer to how the Monetary Policy Committee (MPC) will formulate its policies later on. Amid quite high household debt and still-low family incomes, consumption in the household sector will be subdued this year. Moreover, inflation, although expected to move within the target range (2.5 percent, ± 1.5 precent p.a.), will be a significant factor that will determine monetary policy. On top of that, the US Fed's key policy rate, which may be increased perhaps twice this year, may pressure how we pursue our own monetary policies amid capital outflows and a depreciating Baht. KResearch, however, believes that the MPC will hold the key rate at 1.50 percent, p.a., to assess how the domestic economy is doing from time to time.

Thai Economy