Thailand can deploy both monetary and fiscal policies to cushion the risks of low inflation and slow economic growth as the country's ongoing recovery remains modest and faces downside risks, according to the International Monetary Fund (IMF).
Monetary easing, within a broader expansionary policy mix, could counteract the risk of low inflation becoming entrenched, while strengthening both macroeconomic and financial stability, the IMF executive board concluded following its Article IV consultation with Thailand. The consultation was concluded on May 17 with the results released yesterday.
"Directors supported the use of fiscal space through growth‑enhancing public investment. They agreed that large infrastructure projects would help crowd‑in private investment and play an important role in supporting growth and inflation as well as in facilitating external rebalancing," it said.
"Enhanced communication would improve the effectiveness of monetary policy transmission. A number of directors supported preserving the monetary policy space at this time, with adjustments to the stance when warranted by new developments," it added.
Directors emphasised the importance of maintaining exchange rate flexibility, with intervention limited to avoiding disorderly market conditions. A few directors noted there was scope for scaling back the overall size of interventions, and letting the exchange rate play a greater shock absorber role due to substantial external buffers.
"Directors agreed that Thailand's external position is stronger than warranted by medium‑term fundamentals and desirable policies, with some directors citing Thailand‑specific issues as contributing factors," the statement read.
"They viewed a policy mix of fiscal and monetary stimulus, coupled with structural reforms and a flexible exchange rate, as instrumental to support domestic demand and help reduce the large current account surplus over time," it went on.
"Directors emphasised that such a strategy would facilitate the needed real exchange rate appreciation through a growth‑driven process, boosting real incomes."
The recovery is expected to advance at a moderate pace in the near-to-medium term, it said, noting that public investment would remain a key driver, rising over the next few years in line with the government's infrastructure plans and crowding-in private investment.
Headline inflation is projected to remain around the low end of the tolerance band in 2017–18 amid subdued core inflation, while the current account surplus is expected to decline gradually as domestic demand improves over the medium term.
The IMF directors said Thailand's average headline inflation was 0.2%, below the tolerance band for the second year in a row, reflecting low energy prices and persistently weak core inflation.
In a related development, the Commerce Ministry yesterday reported that consumer price index, based on 422 products and services, edged down 0.04% year-on-year in May, the first decline in 14 months, as fresh fruits and oil prices fell.
April's headline inflation rose 0.38% year-on-year but eased from growth of 0.76% in March, 1.44% in February and 1.55% in January.
On a monthly basis, consumer prices rose 0.15% from April on higher costs for housing, food, education, apparel and footwear.
Nonetheless, core inflation, which excludes food and energy prices, climbed 0.46% year-on-year in May and was up 0.01% from April.
For the first five months of the year, headline inflation rose 0.81% on an annual basis, with core inflation up 0.58% from the same period last year.
Sureeporn Sahawat, deputy director of the Commerce Ministry's Trade Policy and Strategy Office, said the lower prices in May were largely due to a bumper crop of fresh foods including vegetables and fruits. The prices of these fell 12.9% year-on-year as the earlier rains boosted supply.
Domestic oil prices also dropped 20 satang last month, sliding 1.67% from the same period last year.
Thanavath Phonvichai, vice-president for research at the University of the Thai Chamber of Commerce, said the drop in consumer prices shows how the country's economic recovery remains fragile and overall purchasing power is still weak.
Mr Thanavath said he would be watching with interest to see if next month's figures bounce back.
"Signs of a poor economy still exist as indicated by relatively low core inflation," he said. "It has now reached the point where the government has to inject as much of the budget as it can to raise people's purchasing power."
Siam Commercial Bank's Economic Intelligence Center (EIC) said sluggish core inflation indicates domestic demand is recovering slower than expected and purchasing power remains weak.
The EIC cut its headline inflation projection for the year to 1% after previously giving an estimate of 1.4%.
Tim Leelahaphan, an economist at Maybank Kim Eng Securities Thailand, said inflation has slowed recently but will start rising later this year due to the impact of higher energy and fuel prices on transport costs, better domestic demand and rising import prices caused by a weaker baht.