Although the headline inflation rose for the third straight month in September, it is still below the central bank’s target range of 1% – 4%. September’s reading showed a gain of 0.86% y/y, fuelled by the steady rise in oil prices and the impact from new excise taxes on certain goods like sugary drinks, alcohol and cigarettes which were introduced in mid-September. However, core inflation stayed low at 0.83%.

With a still weak pressure from domestic demand and limited influence from cost-push inflation, we expect the overall inflation to stay subdued in 2017. Our base case suggests no change to the 1.5% policy interest rate in 2017 despite calls from the government and businesses for a cut to contain the baht's strength.

However, the surge on baht, which appreciated by 7.7% YTD against the USD, has put a question mark over the rate cut. As the strongest performing currency in the region, it now poses a risk to the export-reliant economy. Reserves reached a record US$191bil, an indication of the BoT’s efforts to tackle currency volatility. We project the average USD/baht at 33.9 and MYR/baht at 12.7145 in 2017.

• The headline inflation rose for the third straight month in September. It gained by 0.86% y/y after a 0.32% y/y rise in August. We found the headline prices increasing 0.58% m/m, fuelled by the steady rise in oil prices and the impact from new excise taxes on certain goods like sugary drinks, alcohol and cigarettes which were introduced in mid-September.

• Despite the gain in headline inflation, it is still below the Bank of Thailand’s (BoT) target range of 1% – 4% as domestic demand remains weak, reflected by the sluggish core inflation which grew by 0.5% y/y. This indicates that the improvement from private consumption is limited. Thus, the pace for private investment to pick up remains challenging.

• With a still weak pressure from domestic demand and limited influence from cost-push inflation, we expect the overall inflation to stay subdued in 2017. Our base case suggests the BoT will keep its monetary policy loose to aid growth, implying no change to the 1.5% policy interest rate in 2017 despite calls from the government and businesses for a cut to contain the baht's strength. The rate has been at that level since April 2015. Also adjustment of rates could pose problems for Thailand’s indebted households, which have debts the equivalent of 80% of the GDP.

• The surge on the baht, which appreciated by 7.7% YTD against the USD, has put a question mark over a the rate cut. As the strongest performing currency in the region, it now poses a risk to the export-reliant economy. Reserves reached a record US$191bil, an indication of the BoT’s efforts to tackle currency volatility. We project the average USD/baht to be at 33.6339 and MYR/baht at 12.7145 in 2017.

Source: AmInvest Research - 3 Oct 2017