Sluggish commodity prices positive for core inflation
The Ministry of Commerce said the domestic general inflation rate for May increased by only 0.53% year-on-year, the lowest level in the past 21 months, due to sluggish prices of petroleum, electricity, and food products.
This figure is much lower than the 2.7% figure the financial market projected for May of this year.
According to Wichanun Niwatjinda, Deputy Director-General of the Trade Policy and Strategy Office (TPSO), the main reasons for this relatively low inflation rate are slow-moving prices of petroleum, electricity, and food products, combined with the low base price used for calculating the inflation rate in May.
The core inflation rate, which excludes volatility in the prices of energy and fresh foods, also came in lower than market expectations, expanding in May by only 1.55% while the market had forecast growth of around 1.7%. This places Thailand in the group of countries with low inflation rates, and makes it the lowest among the seven Asean countries that have announced inflation figures, Wichanun said.
Looking ahead, the Ministry of Commerce estimates that the domestic inflation rate will continue to experience a continuous slowdown, or perhaps even a contraction due to the declining prices of goods in the energy category, Wichanun added.
According to the ministry's projection, the general inflation rate for this year is expected to be between 1.7% and 2.7%, with an average of 2.2%, or even lower, suggesting that real interest rates (policy interest rates minus inflation expectations) may soon turn positive again.
If inflation reverts to positive territory while the Thai economy is still recovering relatively slowly amidst the sluggish global economy and high debt levels in the private and household sectors, Thailand might see a pause in policy interest rate hikes in the near future, Wichanun said.
From an economic perspective, it is believed that the interest rate cycle is nearing its end, but it remains a question for the Bank of Thailand to consider how much ammunition it wants to reserve to fight against the potential downturn in the global economy. At the same time, caution must be exercised as accelerating interest rate hikes before Thai economic fundamentals are ready for it could be risky, Wichanun added.
