Good news: Thailand’s 4.2% inflation lower than expected despite floods

Inflation (Oct) came in much below expectations. Prices rose by 4.2% (YoY) against forecast of 4.6%. Core inflation too rose by 2.9% (YoY) below consensus of 3.1%. The breakdown of the data shows food price inflation moderated in the month (2.3% MoM, saar) despite the floods. Core inflation, too, moderated to 1.5% (MoM, saar) on a sequential basis, probably partly explained by the reduction in public transport costs in September (which were expected to be passed on to consumers of end-products in October). As far as the central bank rate policy is concerned, even if inflation had spiked due to the floods, it would not have had any material implication.

The floods are primarily a temporary supply-side disruption and the central bank will have to look beyond the short-term. The Bank of Thailand acknowledged as much. However, moderation in inflation does create more room for an easier / looser policy stance, at least as a temporary measure. Furthermore, the central bank’s GDP forecast for 2011 and 2012 were lowered last week to 2.6% and 4.1%. The sub-par 2011 growth is attributable to the floods and may yet be lowered as it is not clear if we have seen the worst of the floods.

However, the 2012 growth smells of a bearish outlook – and that cannot be explained by only the floods but by demand-side forces such as external headwinds from Europe or China. Historic experience suggests output will recover to pre-flood levels as machinery is repaired and productive capacity is restored. Further, any reduction in consumption spending due to the floods is likely to be mainly ‘demand postponed’ rather than ‘demand destroyed’ (though consumer wealth probably took a hit).

In other words, the 2012 GDP growth outlook is very weak considering the low base from 2011. This may not mean the central bank is necessarily very bearish but it does reveal the extent of uncertainty surrounding the growth outlook, especially from the deteriorating debt crisis in Europe. If events in Europe disappoint, and considering the signaled upcoming change to the inflation targeting regime, rate cuts cannot be ruled out at the December meeting. Our central scenario still envisages rates on hold at 3.50% but the odds of a rate cut are rising.