No. 2/2011
Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of Thailand (BOT), announced that the Monetary Policy Committee (MPC) released the January 2011 issue of the Inflation Report on 21 January 2011. The Report was issued to enhance public understanding of the BOT’s policy stance, with the key details summarized as follows.
The Thai economy contracted slightly in 2010 Q3 from the preceding quarter, mainly due to weakened domestic and external demand. Private consumption and investment moderated from their unexpectedly high momentum in the first half of the year. At the same time, merchandise exports subsided in line with trading partners’ demand, which were constricted by structural problems in several industrialized economies and high uncertainty in the global economic landscape. Despite some adverse impacts from the flood, preliminary indicators in 2010 Q4 reflected the resilience of domestic demand and its swift recovery. Accordingly, the overall growth in 2010 is expected to turn out slightly higher than that in the previous Report.
Pressure to inflation remained largely unchanged in 2010 Q4, as a result of the weakened sentiments due to the flood and the Department of Internal Trade’s policy not to approve any price adjustment until year-end. Headline inflation decelerated slightly following the price of raw food, especially vegetables and fruits, even in the face of the upswing in energy price in line with the global oil price. Meanwhile, core inflation stayed at the previous quarter’s level, reflecting the fact that most prices of goods and services remained stable.
In forming economic and inflation forecasts for the next eight quarters, the MPC revises the key assumptions from those used three months earlier as follows:
1. Demand for Thai exports is revised up slightly in 2011 mainly attributable to the improved prospects of the US economy, with a strong momentum sustaining well into 2012.
2. The Fed funds rate is anticipated to rise in 2011 Q3, similar to the previous assumption, as some fragility and delay in the US economic recovery are still conceivable.
3. Regional currencies will appreciate more against the US dollar throughout the projection period in line with latest data and strong growth prospects in Asia.
4. Direct government spending for fiscal year 2011 is revised upwards, mostly because of the reclassification of some transfer payments into consumption spending. Both consumption and investment expenditures in fiscal year 2012 will then rise from the preceding fiscal year following the budget expansion.
5. The Dubai oil price assumption is raised throughout the forecast period, in tandem with upward demand pressure coming from the unusually cold weather and the rising global demand. Going forward, the Dubai crude price will continue to edge up following the acceleration in demand from emerging market countries. As a result, the Dubai oil price will average at 91.3 and 98.1 US dollars per barrel in 2011 and 2012, respectively.
6. Agricultural prices will rise gradually over the period ahead, with pressure from both a negative supply shock due to last year’s flood and firming domestic demand. Climate factors and natural disasters also lead to a substantial upward revision in non-fuel commodity prices, mainly through the upswing in prices of food, beverages, and agricultural raw materials. In addition, the continued capital inflows into commodity markets also contribute to the upward pressure. This view is consistent with the IMF’s forecasts of a sizeable surge in prices of food, beverages, and agricultural raw materials over the short horizon.
7. The daily minimum wage assumption is revised up to 215 baht in 2011, before rising to 226 baht in 2012, in line with the economic growth and higher inflation going forward.
Given the key assumptions above, the MPC projects the Thai economy to grow robustly from early 2011 onwards on the back of private spending. The role of both private consumption and investment in driving the economy will become more evident once the impacts of the adverse transitory factors abate. This outlook is supported by latest indicators in 2010 Q4, which pointed toward resilient demand. Furthermore, the improvement in exports following the global recovery should also lend additional support to growth.
The MPC projects price pressure to rise persistently over the period ahead. Core inflation will pick up in 2011 as a result of a greater pass-through of production costs to retail prices given the pent-up pressure from delayed price adjustments. Going forward, this would also gain support from up-trending oil and commodity prices, as well as the minimum wage raise pushing up labor costs. In addition, rising demand pressure and the narrowing output gap would also allow for more pass-through of production costs to consumers. With regard to headline inflation, the MPC anticipates an upward trend in line with core prices and the prices of energy and raw food, despite decelerating slightly from the previous forecast due to the permanent extension of electricity charge subsidy. Even though price pressure is expected to carry on into 2012, inflation readings might be more subdued partly because of the preceding year’s high base due to the termination of non-electricity components in the subsidy measure.
The MPC takes note of risk factors that might cause the economy to deviate from the baseline projection. Overall, the MPC judges that downside risks to growth would still outweigh upside risks. While risks from trading partners’ and global economies have reduced from the previous projection, domestic risks remain, especially those related to political uncertainty. Therefore, the fan chart for economic growth is skewed downward but to an extent less than that in the previous Report, reflecting lowered risks from the external front. Economic growth, accordingly, is projected to be in the range of 3.0-5.0 per cent in both 2011 and 2012.
As for the inflation projection, the MPC views upside risks to dominate downside ones. The MPC takes a particular note of pressure coming from the upswing in the prices of oil, commodity, and raw food that could be higher than assessed in the baseline scenario. Reflecting the risks above, the fan charts for both headline and core inflation are skewed upwards throughout the projection period. The MPC forecasts headline inflation to average within the ranges of 2.5-4.5 per cent in 2011 and 2.0-4.0 in 2012. Core inflation, on the other hand, is projected to be within the ranges of 2.0-3.0 and 1.5-2.5 per cent in 2011 and 2012, respectively.
In the meeting on 1 December 2010, the MPC viewed the Thai economy to be underpinned by solid fundamentals and would grow robustly over the period ahead. Meanwhile, inflationary pressure would tend upwards in line with cost pressure from domestic growth. As the considerably accommodative monetary policy stance at the time became less necessary, the MPC decided to raise the policy interest rate by 0.25 per cent per annum, from 1.75 to 2.00 per cent per annum. In its subsequent meeting on 12 January 2011, the MPC maintained the same positive view on growth and inflation. Along with the return of economic growth into its normal pace, inflation pressure is expected to rise following the greater pass-through of production costs to prices, as well as the acceleration in domestic demand and commodity prices. The MPC, therefore, decided unanimously to raise the policy rate by 0.25 per cent per annum, from 2.00 to 2.25 per cent per annum.
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Source: Bank of Thailand