Thailand Rate Hike Expected Despite Lower October Inflation

Thailand's October inflation came in lower than expected (1.23%) , however, this is not all good news according to Citi analyst Nalin Chutchotitham. 


October Inflation

October's results were below the consensus of 1.3% and down from September's 1.33%. Core inflation was even lower at 0.75% compared with 0.8 the month before. The biggest surprise came from raw food prices, which fell by 1.48%, steeper than September's 1.16% decline. However, Thailand's central bank would like to see strong core inflation. 

"This level should not prevent it from commencing its policy normalization"

Weaker industrial activity...

Both manufacturing production and exports have come in worse than expected in September, declining 2.6% and 5.5%.Exports excluding gold were down 1%, with contributing factors including natural disasters in Asian economies. September also saw a deceleration of vehicle exports to Australia, electronics, solar panels and washing machines.

Thailand's Nikkei manufacturing Purchasing Managers' Index, a measure of sentiment, also tipped over into contradiction territory at 48.9, down from September's neutral 50 figure. 

Domestic Demand is Resilient

Domestic demand has remained robust throughout September & October with private consumption rising by 4.4%, an extension of August's 7.4%. Car sales stayed strong while machinery and equipment sales also stayed healthy. Government spending on infrastructure, planned for before the February 2019 election is expected to help maintain spending growth going forward.

Policy Normalisation Ahead

"The Bank of Thailand has been building its case for policy normalization since early this year, while waiting for inflation to steer clear of the target’s lower band and domestic demand to strengthen. We think the recent weak data are not bad enough to steer the MPC away from this path, especially when it explained that the key purpose for normalization is to build policy space and lower financial stability risks – both of which take a longer-term view," added Citi. Risks to this outlook include further weakness of exports and tourism, which could lead to a delayed rate hike in early 2019, also raising the probability of a one-and-done hike."

Nalin Chutchotitham, Citi Analyst, ASEAN

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