Thailand: BoT balloons inflation view to 4.9%

The Bank of Thailand (BoT) skyrocketed its inflation rate forecast for this year to 4.9% from 1.7% because of energy and food price surges attributed to supply shock from the Russia-Ukraine war.

Headline inflation is projected to be 4.9% in 2022, higher than the central bank’s inflation targeting range of 1-3%.

The bank assesses the headline inflation rate will tally 1.7% next year, a slight increase from an earlier estimate of 1.4%, said Piti Disyatat, secretary of the central bank’s Monetary Policy Committee (MPC).

The BoT also cut its 2022 GDP growth forecast from 3.4% to 3.2% and slashed the 2023 projection from 4.7% to 4.4%.

The MPC meeting on Wednesday decided to maintain the policy rate at the existing level of 0.5%.

“Inflation will exceed 5% in the second and third quarters this year, driven mainly by rising energy prices and the pass-through of food prices,” Mr Piti said.

However, inflation is projected to drop and return to the target range in 2023, owing in part to the assessment that the rise in energy prices will not persist, said the MPC. Upside risks to inflation remain, primarily from higher-than-expected oil prices and cost pass-through from producers to consumers. The MPC believes the rise in inflation has been mainly due to cost-push factors, he said.

The short-term outlook for one year has the inflation rate continuing to increase, but it should decline for the medium to long term, over the next three to five years, said Mr Piti.

The central bank predicts an average Dubai crude oil price of US$100 per barrel this year, jumping from an earlier forecast of US$68.3 per barrel. The oil price is expected to fall to $90 per barrel in 2023, up from a previous projection of $69.5 per barrel.

Demand-pull inflationary pressures remain subdued in line with a slow recovery of income, while medium-term inflation expectations remain anchored within the target range, said the MPC. The committee will continue to monitor inflation dynamics to ensure that medium-term inflation expectations are consistent with the monetary policy target, he said.

Mr Piti said Thailand’s economy is not in stagflation because it has been picking up gradually and remains in a recovery outlook. The higher inflation rate is expected for only the short term, he said. The central bank defines stagflation as an economic slowdown and rising inflation rate trend for the long term.

The MPC projects Thai GDP growth of 3.2% this year and 4.4% next based on improving domestic demand and tourism. The impact of the Omicron outbreak on economic activities is expected to be more contained than previous waves.

Sanctions against Russia have pushed the cost of goods higher, but will not derail the overall recovery path, said the committee.

Nonetheless, downside risks to growth remain, including prolonged shortages of raw materials in certain industries and the impact of higher prices on living costs for households and production costs for businesses, particularly for vulnerable groups, said Mr Piti.

The committee views the government’s latest measures to ease the cost of living for lower-income earners and vulnerable groups as appropriate given the specific time frame.

Fiscal measures should support the economic recovery in a targeted manner, with a focus on generating income and alleviating living expenses for vulnerable groups, said the MPC. Monetary policy should contribute to continued accommodative financial conditions, said the committee.

The central bank maintained its outlook for foreign arrivals this year at 5.6 million, with Russian and Ukrainian visitors expected to total 400,000.