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Economics: Thailand
Economics – Markets – Strategy
There is still some
sense in reducing
the degree of
policy
accomodation
Inflation and monetary policy
We recently lifted our 2008 CPI forecast again to 6.4%. Inflation is really a wild
card this year. If we see a big drop in food prices, inflation can decline pretty
rapidly. Conversely, if food and fuel prices increase further or do not decline,
then inflation will be higher than our forecast. In any case, core inflation would
head higher as higher crude oil price results in higher transportation costs which
in turn push the price of nearly all products higher.
We think the BoT would not mechanically react to higher core inflation. Rather,
the key question policy makers will ask is whether this is a one-off increase in
price level or is there a risk of a more permanent increase in inflation. The
answer to this question depends on inflation expectations and strength of domestic
demand. This, in turn, depends on a return to normalcy on the political front, a
normalcy that is not simply a temporary calm before the storm.
The point is that if politics continues to disappoint, then BoT can afford to keep
rates at accommodative levels. However, we think there is sense in reducing the
degree of accommodation at some point. Therefore, we have maintained our
forecast for rates to be lifted by 50bps to 3.75% by end-08 despite downgrading
the GDP forecast. We think it is more likely that this hike comes in 4Q08 than
3Q08. Uncertainties on global growth should ease by fourth quarter and the
degree of domestic demand recovery in Thailand should also be apparent. An
earlier rate hike, however, cannot be ruled out.
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