Persistent inflationary pressure expected

Businesses' 12-month inflation expectations in July averaged 4 per cent, above the 3.8 per cent in the previous month's survey, according to the central bank's data.

About 42.3 per cent of businesspeople surveyed in July expected headline inflation to stay in a range of 4-6 per cent over the following 12 months, up from the 38.8 per cent who had forecast this in June.

Some 42.8 per cent expected headline inflation to be in range of 2-4 per cent in the period, down from 46.3 per cent in June.

"Inflationary pressure is expected to remain, as seen from higher inflation expectations in the survey," said Mathee Supapongse, senior director for the Domestic Economy Depart-ment of the central bank.

The BOT is also studying how much of an impact the decline in oil prices following the government's effort to ease the cost-of-living burden will pass through to the Consumer Price Index.

"Those who will gain from this measure could spend more on other things. We need time to study its effects and the net impact," he said.

Headline inflation stood at 4.08 per cent in July while core inflation, which excludes volatile food and energy prices, accelerated 2.59 per cent.

"Core inflation rose on [higher prices of] prepared food and the pass-through of costs for products in the basket of core inflation," Mathee said.

"Production costs affect business confidence in the current and future periods; however, business sentiment remains satisfactory," he added.

The current Business Sentiment Index, constructed by the central bank, remained at 51.2 in July, while the three-month expectation index stood at 55.2. A reading above 50 indicates business confidence. Economic growth eased in July on production declines in the agricultural and industrial sectors and decreases in domestic demand, especially private consumption. However, thanks to expected rises in farm income and the new government's policies, domestic demand could rise in the future.

Agricultural production contracted 7.3 per cent year on year in July after shrinking 8.1 per cent in the previous month, mainly on lower rice production as a result of the government campaign to dissuade farmers from second-crop plantation, Mathee said.

The Manufacturing Production Index shrank 1.1 per cent year on year in July, because of contracting output in several industries, especially garments and textiles, electronic tubes and parts, and chemicals.

Capacity utilisation fell slightly to 63 per cent, from 64.1 per cent in the prior month.

The automobile sector could continue its expansion, as production was not yet at full capacity, while the electrical-appliances sector is expected to grow, Mathee said, adding that the chemicals sector is likely to expand after completion of a major overhaul.

The Private Consumption Index expanded 2.1 per cent year on year in July, slower than the 3.4 per cent recorded in June, due to a contraction in of farmers' incomes and consumers' postponement of buying decisions after flooding in several provinces.

"Consumers were also waiting for a clearer picture of the [new] government policies then [in July]," he said.

The Private Investment Index rose 6.2 per cent year on year in July, mainly on an improvement in commercial-vehicle sales, which resumed growth of 10.1 per cent after two consecutive months of contraction due to disruption of supplies from Japan.

Private credit continued to expand in July, by 16.2 per cent, which supported investment, and the government continued its spending to boost the economy with a cash-balance deficit of Bt38.6 billion in the month, Mathee said.

Exports grew 36.4 per cent year on year in July while imports expanded 13.1 per cent during the month.