Even though Thailand's October inflation came in lower than expected, a rate hike may be on the cards at the upcoming Nov 14 meeting, Citi analyst Nalin Chutchotitham wrote in an economics flash on Thursday. Citi's base case is for a 25 bp rate hike.
October inflation lower than expected
Headline inflation in October was 1.23 per cent year-on-year, below the consensus estimate of 1.3 per cent and down from September's 1.33 per cent. Core inflation was also lower at 0.75 per cent year-on-year, compared to 0.8 per cent the month before. A decline from August's peak of 1.62 per cent had been expected, due to high base effects from energy prices. But the surprise came from raw food prices, which fell by 1.48 per cent, steeper than September's 1.16 per cent decline.
Yet although Thailand's central bank would like to see strong core inflation, "this level should not prevent it from commencing its policy normalization", said Citi.
Weaker industrial activity...
Both manufacturing production and exports came in worse than expected in September, declining 2.6 per cent and 5.5 per cent respectively year-on-year. Exports excluding gold were down 1 per cent, with contributing factors including natural disasters in some Asian economies; an earlier acceleration of vehicle exports to Australia; a higher base for electronics exports in 2017; and accelerated exports of solar panels and washing machines to the United States before the start of “safeguard” measures.
Thailand's Nikkei manufacturing Purchasing Managers' Index, a measure of sentiment, also tipped over into contractionary territory at 48.9, down from September's neutral 50 figure.
...but domestic demand resilient
Yet domestic demand remains robust, noted Citi. Private consumption rose 4.4 per cent year-on-year in September, an extension of August's strong 7.4 per cent growth. Car sales also stayed strong. Although the private investment index was flat, machinery and equipment sales stayed healthy. On government spending, Citi said: "Government efforts to jumpstart more infrastructure projects prior to the planned election in Feb 2019 should help maintain public spending growth going forward."
Citi noted that overall, "there is still a clear pick-up of economic activity" in the first nine months of 2018 compared to 2017. The main exception of farm income was due to prices, with production staying healthy.
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," said Citi, noting that two members of its Monetary Policy Committee (MPC) have called for a hike since September, and a senior bank official has suggested that the MPC would be unlikely to postpone its rate hike beyond 1Q19.
"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.