Central bank unfazed by headline inflation

Central bank unfazed by headline inflation

Rise will not press monetary policy

The Bank of Thailand (BoT) expects high headline inflation to be short term and will not pressure monetary policy and the economic recovery.

Headline inflation has been rising, mainly due to higher global energy prices, and it is expected to further increase next month, according to the central bank.

The BoT maintains its existing assessment of the headline inflation rate this year at 1% and 1.4% next year and these forecasts remain within the target in the range 1-3% under upside risks, including the elevated global energy prices persisting longer than expected and global supply constraints becoming more prolonged, said Piti Disyatat, secretary of the BoT's Monetary Policy Committee (MPC).

Headline inflation would increase temporarily owing to supply-side factors, particularly energy prices which would likely decline by early next year. With this scenario, it is possible the BoT will revise up the headline inflation forecast at the MPC meeting next month.

However, the figure in the revision is unlikely to be a significant number because the inflation would be offset by the government's subsidies for energy prices and electricity bills, he added.

Mr Piti said the high inflation factor would not pressure the BoT's monetary policy and the country's economic recovery trend.

The Commerce Ministry recently reported that headline inflation rose by 2.38% year-on-year in October from a 1.68% increase in September, driven by soaring prices of gasoline and some raw food, especially fresh vegetables, which were affected by floods in several areas.

Presently, the BoT maintains the existing forecast for economic growth at 0.7% this year and 3.9% next year.

The MPC voted unanimously to maintain the policy rate at 0.5% on Wednesday.

The committee assessed that the economy had bottomed out in the third quarter of 2021 and entered the recovery phase following the relaxation of containment measures and the reopening of the country. Meanwhile, downside risks to the economic projection decreased on account of the accelerated vaccination progress. However, the fragile recovery would remain subject to uncertainties.

Even though investors predict that the US Federal Reserve could raise its policy rate faster than the existing expectation in late 2022, the BoT assessed that the Fed would not surprise the market by doing so, Mr Piti said.

If the Fed increases its policy rate faster than the estimate, it would impact foreign capital flow worldwide and pressure the baht's exchange rate as well.

Despite the baht firming for a while compared to the US dollar, the local currency showed a depreciation of around 6-7% against the greenback on a year-to-date basis. On exchange rates, the baht relative to the US dollar exhibited more volatile movements owing to monetary policy in advanced economies and uncertainties in the Thai economic recovery outlook.

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