Central bank sees low level of inflation
Headline inflation should remain at a low level for a period of time, though there is high uncertainty surrounding its path, the Bank of Thailand’s chief said in an open letter to the finance minister.
The central bank’s rate-setting Monetary Policy Committee (MPC) has projected headline inflation over the next 12 months (July 2020-June 2021) at -0.9% on average, a ratio lower than the monetary policy target, said governor Veerathai Santiprabhob.
On Dec 6, 2019, the finance minister and the MPC agreed to set the monetary policy target for price stability such that headline inflation would be within a range of 1.0-3.0% for the medium term and in 2020.
The agreement also designated the MPC to write an open letter to the finance minister should average headline inflation in the past 12 months or a forecast of average headline inflation over the next 12 months breach the target range.
On July 3, the Commerce Ministry issued a statement indicating that June headline inflation stood at -1.57%. This resulted in an average inflation rate of -0.31%, below the target, for the past 12 months (July 2019-June 2020).
The lower figure was attributed to supply-side pressures that would likely remain low, since a slow global economic recovery would continue to weigh on global energy prices. Despite lockdown measures being loosened in many countries, social distancing measures would remain in place, resulting in subdued economic activities.
Prices of goods would stay at low levels due to excess production capacity in many industries, following the gradual global economic recovery, Mr Veerathai said. But energy prices would likely be volatile as a result of pending geopolitical risks.
Although fresh food inflation would likely decelerate somewhat, given a high base in 2019, it would remain at a high level, partly owing to volatile weather conditions such as the drought that could affect supplies of certain agricultural products.
“The projection of negative headline inflation did not imply that Thailand was facing deflation risk at present,” Mr Veerathai said. “First, overall prices of goods and services would not persistently contract. Headline inflation was projected to rise towards the target in 2021.
“Second, prices of goods and services contracted only in some categories. Prices of around 70% of goods and services in the inflation basket increased or remained stable.
“Third, the public medium-term headline inflation expectations remained anchored within the target.”