Core inflation rises closer to top of the target band in Sept
Thailand's September inflation, at 4 per cent, was marginally above consensus of 3.9 per cent but much lower from 4.3 per cent in August, convincing Barclays Capital that no more policy rate hike will come this year or in the first half of 2012.
In its research, the bank believes that the Bank of Thailand would become less hawish.
"The BOT should remain on hold given that core prices are less likely to breach the upper band of the target, in our view, though they may remain close to the top. We believe the next key event to watch for is announcement of inflation targets for 2012, which is expected in the next two weeks. While we do not expect a major change in the targets, we think they could be moved marginally higher from the current level of 0.5-3 per cent for core inflation."
Barclays believed that inflation already peaked in August and it eased in September due mainly to the decision to slash excise duties on petroleum products.
Core inflation, however, remains sticky, coming in at 2.92 per cent on year, in line with market expectations of 2.9 per cent. While this appears to be the peak for core prices for now, especially in light of hefty price cuts for gasoline and diesel, Barclays expects core inflation to remain close to the top end of the inflation target band. On a month-on-month basis, core CPI inflation rose 0.21 per cent versus 0.34 per cent in August.
Looking at the inflation details, the expected decline in vegetable and fruit prices did not materialise, possibly due to recent flooding in southern Thailand. Food inflation remains high, and food's contribution to overall inflation rose to 292 basis points from 278 basis points, owing to the unexpected rise in vegetable and fruit prices. The risks of a spike in food prices are rising at the margin, given the sharp increases in rice prices over the past six weeks. Indeed, Thai fragrant rice prices have risen to their highest levels since May 2008.
Transport costs were weaker, with transportation's contribution falling to 21 basis points from 100 basis points in August, given lower energy prices on administrative controls designed to ease the burden. But this impact on lowering inflation expectations remains to be seen. Amid decent domestic demand, overall inflation expectations could remain sticky, especially given rise in rice prices and a tight labour market.
