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Thailand: EIC expects realistic inflation target rejig

Siam Commercial Bank’s research unit, the Economic Intelligence Center (EIC), expects policymakers to adjust the inflation target to better reflect changing economic circumstances so it can remain an effective instrument in determining monetary policy movement.
Even though headline inflation has entered the lower end of the Bank of Thailand’s target inflation range since April after staying below the band for the past three years, the central bank has signalled a possible band adjustment by saying the inflation rate is increasing at a slower pace than the country’s economic growth because of structural problems, said Yunyong Thaicharoen, head of the EIC.
Moreover, it was the result of cost-push and not demand-pull inflation, he said, noting the oil price surge led to the inflation spike.
The law allows the Finance Ministry and the Bank of Thailand to revise inflation targeting on an annual basis, more frequent than other central banks’ 3-5 year period.
The central bank’s 2018 headline inflation target is set at 2.5% plus or minus 1.5% on average or in a range of 1-4%.
The research house predicted that the country’s headline inflation would increase to 1.3% this year from 0.7% in 2017.
The minutes of the Bank of Thailand’s Monetary Policy Committee (MPC)’s June 20 meeting showed that the rate-setting panel had extensively discussed the path to a rate hike at the meeting.
Amid the lack of inflationary pressure, the EIC forecast that the Bank of Thailand would stand pat on its policy rate of 1.5% this year before starting the normalisation process in the first half of 2019, said Mr Yunyong.
In the short-term, the Bank of Thailand will mainly focus on inflation targeting and economic growth rather than financial stability and policy space. But the MPC and Financial Institutions Policy Committee had raised concerns about areas of financial fragility, including the higher mortgage loan-to-value ratio.
“Despite improving economic momentum and a higher inflation rate, other uncertainties need to be monitored, especially protectionist US measures, which would impact offshore capital outflows and monetary policy,” said Mr Yunyong.
Risks from the Sino-US trade spat are expected to accelerate in the second half. The research house then revised down its export growth forecast for this year from the previous estimate of 9.9% to 8.5%.
The marginally downward revision could be attributed to the strong growth for the first five months of this year at 11% year-on-year, he said.
The impact from the Sino-US trade rift on Thai exports would be limited this year, said Mr Yunyong.
The EIC also upgraded the country’s GDP growth projection this year to 4.3% from 4% because of the stronger than expected growth of 4.8% for the March quarter.
Thailand’s growth improved in the first half of the year, becoming more broad-based, driven by external factors from both merchandise exports and tourism.

Source: https://www.bangkokpost.com/business/news/1500650/eic-expects-realistic-inflation-target-rejig