No.

13/2011

Inflation Report April 2011

Mr. Paiboon Kittisrikangwan, Assistant Governor, Bank of Thailand (BOT), announced that the Monetary Policy Committee (MPC) released the April 2011 issue of the Inflation Report on 28 April 2011. The Report was published to enhance public understanding of the BOTs policy stance, with the key details summarized as follows. Recent developments in inflation and economic conditions The Thai economy expanded robustly by 7.8 percent in 2010, on the back of strong export momentum underpinned by the global economic recovery and rising contribution of private-sector demand. In addition, businesses also accumulated inventories to make up for destocking during the preceding years global crisis. Growth rebounded into positive territory in 2010 Q4 after recording negative for two consecutive quarters. This owes mainly to a pick-up in exports driven by trading partners demand, combined with a comeback in consumer spending thanks to rising farm income, healthy employment, and low interest rates. Private investment, however, subsided from the previous quarter due to the floods impacts. Inflation pressures continued to build up in 2011 Q1. Headline readings edged up in line with: (1) soaring fresh food prices, as global supply was constrained by natural disasters; and (2) up-trending energy prices, which followed a marked acceleration in global oil prices due to both global demand growth and political unrests in the Middle East and North Africa. Barring the effects of volatile fresh food and oil prices, core inflation still ticked up in tandem with prices of prepared food and construction materials. Economic growth and inflation projections In forming economic and inflation forecasts for the next eight quarters, the MPC revises the key assumptions from those used three months earlier as follows: 1. Demand for Thai exports is revised up slightly throughout the projection period. Recent natural disasters will weigh on Japans growth in 2011 to some extent, but the impact on the Thai economy will be limited. Trading partners demand will continue to expand well in 2012. 2. The U.S. federal funds rate is anticipated to rise in 2012 Q1 as previously assumed, consistent with firm recovery in the U.S. 3. Regional currencies will appreciate against the U.S. dollar slightly more throughout the projection period, in line with recent data and strong growth prospects in Asia. 4. Direct government spending is revised down for both fiscal year 2011 and 2012. Government consumption declines because of the reclassification of more budgets into transfer payments, while investment spending also edges lower following state-

owned enterprises delayed disbursement, particularly that of the State Railway of Thailand. 5. The Dubai oil price projection is raised throughout the forecast period, mainly driven by supply pressure due to political tensions in the Middle East and North Africa. The revision also owes in part to rising global demand, particularly China and the U.S. As a result, the Dubai oil price averages at 107.7 and 110 U.S. dollars per barrel in 2011 and 2012, respectively. 6. Non-fuel commodity prices are revised up substantially in 2011, in line with latest data showing a marked increase in food and metal prices. Prices of agricultural raw materials and food are likely to remain persistently high. Over the period ahead, metal prices will continue to edge up thanks to rising oil prices and the global recovery. The overall upward trend is expected to carry well into 2012 given the robust global growth. 7. Domestic agricultural prices are revised up slightly in 2011 in the light of recent data. Weather factors contribute significantly to current pressure on supply, and are likely to drive the prices up going forward. The prices are then assumed to grow in 2012 at a pace close to the previous assumption. 8. The daily minimum wage assumption remains unchanged at 215 baht in 2011, before rising to 226 baht in 2012, broadly in line with economic growth and higher inflation going forward. This is also consistent with the governments recent policy, which seeks to remunerate workers other expenses such as those for social and recreational purposes. Given the key assumptions above, the MPC projects a sustained economic growth for 2011 driven by exports and private demand. The January-March quarters economic indicators are broadly supportive of the view, indicating a sharp pick-up in exports following the global recovery and an increasing role of domestic demand in particular, robust investment. Although the flood in the South and the Japans crisis will weigh on growth at least up to the April-June quarter, the impact on the broader economy is assessed to be limited, with the economy approaching its full potential in the second half of the year. Growth will then become more balanced in 2012, owing in part to strong private demand. Exports will also continue to ride on strong momentum thanks to robust recovery in both emerging market and developed economies. Accordingly, under the baseline scenario, the MPC projects growth to be 4.1 and 4.2 percent in 2011 and 2012, respectively. Inflation pressures, on the other hand, are likely to build up robustly for the rest of the year. The anticipated pick-up in core inflation in 2011 owes importantly to the greater passthrough from high production costs to consumer prices, in line with surging oil and commodity prices. Other contributors include demand expansion, as reflected in the closing of the output gap, and also the forthcoming termination of cost-of-living reduction measures. As a result, core inflation might exceed the targets upper bound during the second half of 2011. Similarly, headline inflation is also projected to rise in line with core inflation and rising prices of fresh food and energy components. Core inflation readings will then moderate in 2012 along with the more normalized pace of economic growth, while staying below headline figures that will gain from persistently high fresh food and oil prices. Under the baseline scenario, therefore, the

MPC forecasts core inflation to be 2.3 percent in 2011 and 2.1 percent in 2012. Headline inflation is projected to be 3.9 and 3.2 percent for 2011 and 2012, respectively. The MPC takes note of major risk factors that might cause growth to deviate from the baseline projection. On the whole, downside risks to growth are likely to dominate upside risks. Despite the lower uncertainty surrounding trading partners and global growth overall, elevated oil prices will constrain consumer and producer spending. Therefore, the fan chart for economic growth is roughly similar to the previous one, both in terms of width and skewness. With regard to inflation projection, the MPC views upside risks to outweigh downside ones, mainly due to crude and commodity prices that could be higher than assessed. Reflecting the risks above, the fan charts for both headline and core inflation are skewed upward throughout the projection period. Monetary policy stance in the last 3 months In the meeting on 9 March 2011, the MPC projected the Thai economy to maintain its growth momentum over the period ahead, firmly backed by solid fundamentals. As inflation pressures heightened in line with soaring oil and commodity prices, the MPC judged it appropriate to anchor inflation expectations and preempt imbalances in the financial sector. Therefore, the MPC decided unanimously to continue rate normalization by raising the policy rate by 0.25 percent, from 2.25 to 2.50 percent. Then in its subsequent meeting on 20 April 2011, the MPC agreed on the same positive outlook for growth, given that both domestic and external demand conditions remained strong. While some slowdown in manufacturing and exports was anticipated as a result of Japans crisis, the impacts of the flood in the South were likely to be limited. Inflation pressures would build up as robust demand intensified the passthrough from production costs to overall prices, as reflected in rising inflation expectations. In addition, persistently high oil and commodity prices, combined with the gradual lifting of price administration measures, would add to price pressures going forward. The MPC thus decided with a 6-1 vote to raise the policy rate by 0.25 percent, from 2.50 to 2.75 percent. Bank of Thailand 28 April 2011 For further information: Bodin Civilize Tel. 0 2356 7876 e-mail: bodinc@bot.or.th