Growth pains: Conditions for rate hikes not in position yet
A key focus for the Bank of Thailand this year is to strike a balance between facilitating domestic recovery and ensuring long-term price stability.
A closer look at current economic data suggests that the recovery has gained traction, with private demand for rehabilitation accelerating after last year’s floods. Although some factories damaged by the floods are still shut, there are strong expectations that the economic recovery should gain momentum and return to normal by the third quarter of this year. Given these expectations, concern on growth has eased, allowing the BOT to pay greater attention to inflation.
Meanwhile, inflation risk appears to have risen due to a combination of factors – a big rise in the minimum wage, sustained high oil prices, and domestic demand pressure. Hence the raised expectation of possible rate hikes by the BOT in the foreseeable future. Nonetheless, we believe that conditions for rate hikes are not in position yet, at least in 2012.
Indeed, we are still sceptical about the pace of the recovery, especially during the first half of this year. Our concerns arise from external risk factors – tail risks from the European debt crisis in particular. If China’s economic growth dips below our 8.1 per cent projection, this could exacerbate downside risks to Thailand’s growth via exports. Our observation in the region is that Asia remains in sluggish export momentum. Looking forward, China’s slow demand and the fading positive effect of high commodity prices will suppress Asia’s export growth in the near term.
On the inflation front, we expect general price pressures to increase but remain under control. Given the BOT’s own estimate, the increase in minimum wage will drive up headline inflation by only 0.2 percentage points on its inflation forecast for 2012. Against this backdrop, we believe that conditions for rate hikes are not in position, as growth could surprise on the downside in the foreseeable future.
Usara Wilaipich is senior economist at Standard Chartered Bank (Thai).
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