MPC expected to maintain rate at 3%

 

 

After two rate cuts, 25 basis points each, in November 2011 and January 2012, the MPC had put rate on hold at the March and May meetings. According to the BOT, inflation expectation in the next 12 months surveyed in April was at 3.5 per cent, down from 3.7 per cent surveyed in March.     

Krungsri Research and TMB Bank's research house believed that though inflation could quicken in the second half, there is a room for the MPC to take no action at this time. 

In May, inflation grew 2.53 per cent, close to 2.47 per cent in April. This was down from 3.39 per cent in the first quarter. According to Krungsri Research, inflation in the second half cold rise by 3.9 per cent due mainly to cost-push pressure, especially the minimum wage hike, higher levy to the Oil Fund as well as an increase in electricity rates. 

  "However, inflationary pressure may not speed up as much as the previous expectation," it said. The house also revised down 2012 inflation forecast to 3.2-3.7 per cent from the previous projection of 3.5-4.0 per cent. "Given our latest inflation outlook coupled with growing global economic risks that could affect Thai economy from now on, we foresee that the Thai policy interest rate may be kept unchanged at 3 per cent during the rest of this year, which is a quite low level and a still-accommodative policy for fostering Thai economic recovery."   

Explaining why it believed the MPC would hold the policy rate at the June 13 meeting, it said global economic risk is more heightened, particularly the spread of euro zone’s sovereign debt crisis from Greece to Spain’s banking crisis amid unfavourable global economic environment. The  US and Japanese economic recovery slowly improves and is fragile while BRICs and Asian economies significantly slow down. This causes a drop in commodity prices including oil and crop prices, while consumers are cautious on spending due to weaker-than-projected global economy and local political uncertainty.

Lessening the inflationary pressure in the second and third quraters is the government's decision to postpone the hikes in LPG price for transport use and NGV price for three months until August 15. Meanwhile, 200 manufacturers promised to maintain goods prices until end-September.

"Although inflationary pressure is likely to speed up in the second half, the acceleration pace looks set to be less than our previous expectation," Krungsri Research said.

  TMB Analytics noted that while the MPC is expected to put the rate on hold at this meeting, its future decision will be chiefly influenced by external factors.

It noted that despite advances in the domestic economy after floods, the weakening in the US and Chinese economies helped lessen inflationary pressure. Still, it remains more complicated to forecast the future directions given the unclear development in global finances.

To the house, inflation is the key domestic factor to influence the direction. Oil prices could head up on improvement in the US and Chinese economies and this would quicken inflation. 

The ongoing eurozone crisis and economic improvement in the US and China would be two external factors to watch. A possible exit of Greece from the euro zone is now feared to send a contagious effect to other countries and the global financial market. Meanwhile, economic improvement in the US and China could raise global demand and inflation. 

"External factors put higher weight on Thailand's inflation than domestic factors. Given the uncertainties, the policy rate could remain unchanged for the whole year, or it could be raised only slightly," it said.