Central bank expects low inflation to stay

Meanwhile, the proposal to change the central bank’s inflation target from core to headline inflation next year is awaiting approval from the Cabinet. 

BOT spokesman  Chirathep Senivongs Na Ayudhya yesterday said inflation in the first quarter of next year would continue to be on the low side, as the global price of oil had dropped as a result of excess supply amid a sluggish recovery of the world’s economy. 

“Opec [the Organisation of the Petroleum Exporting Countries] did not lower its supply [output], because it wanted to maintain its own proportion of the world oil market, and also wanted to keep the oil price low to discourage the US from producing any more oil from shale deposits,” he said.

Chirathep said global oil prices would continue to be low, and the world’s consensus was for a period of low inflation for the next year or two. 

Lower oil prices will be good for Thailand’s balance of trade, since the country imports a lot of it, he added.

“Thailand’s consumption of oil products is equal to 12 per cent of nominal GDP [gross domestic product], and 70 per cent of what is being consumed is diesel fuel, which is mostly use for logistics. So in terms of cost, it [lower oil prices] would help spur the economy, since business costs would be better and the country’s balance of trade would also improve,” he said.

As to the effect of falling oil prices on inflation, the spokesman said the current issue surrounding the oil price was a matter of supply.

The central bank does not expect to see any deflationary situation developing, since deflation is caused by a contraction in demand, and that is not what is happening in Thailand at the moment, with the country’s economy returning to its normal growth path, he explained.

 

Energy prices 

“Since energy prices are expected to be low next year, inflation in the first quarter might also be on the low side. Meanwhile, the new headline-inflation target that has been proposed by the BOT is a target for the full year, which is different from the core-inflation target, which is for each quarter,” he said.

“The change in the target [if approved] means that if inflation is really low, the central bank will have to continue to explain what is happening and, as stated before, the current period of low inflation until the first quarter of next year is not a result of contracted demand. It is the result of a supply-side situation, and especially the lower global oil price,” he stressed.

The core inflation rate as of end-October was 1.67 per cent, while headline inflation stood at 1.48 per cent.

The BOT’s current core-inflation target for the year is 0.5-3 per cent.

The Finance Ministry earlier said the new headline-inflation target proposed for next year would be around 3 per cent, plus or minus 1.5 percentage points. This means that the new target headline-inflation range for 2015 should be 1.5-4.5 per cent.