● Headline inflation edged down for the second straight month, coming in at 0.9% YoY in June (May: 1.1%), slipping below the Bank of Thailand’s (BoT) target range of 1.0-4.0% and consensus estimate of 1.0%. Of note, on a MoM basis, the index declined by 0.4% (May: +0.5%), marking its first deflation for the year. The core inflation sustained a tepid growth of 0.5% YoY, its lowest in 22 months, suggesting continued weakness in demand-pull price pressure.

● The lower CPI growth was attributable to declines in the indices of transport & communication (-1.6%; May: +0.1%) and apparel & footwears (-0.2%; May: 0.1%), as well as lower growth in prices of medical & personal care (0.1%; May: 0.2%). Transport index fell markedly to a 5-month low, reflecting a drop in domestic fuel prices (Gasohol 95: THB27.29/litre; May: THB29.4/litre) and Brent crude oil price (USD63.56/b; May: USD71.17/b), amid unfavourable developments surrounding the US-China trade dispute in June. This has more than outweighed the increase in food index (3.1%; May: 2.8%), which came in at 54-month high, primarily on higher prices of fresh fruits and vegetables.

● Mixed inflation trends across the advanced and developing economies. US inflation inched down in May as cheaper gasoline outpaced a rebound in the cost of food, reinforcing the case for a rate cut this year, in line with an increasingly dovish signal sent by the Fed following its June FOMC meeting. Inflation in the Eurozone remained below the European Central Banks’s (ECB) 2.0% inflation target, due mainly to a slowdown in cost of energy and services. Meanwhile, China experienced a 15-month high inflation as the African swine fever epidemic continued to exert upward pressure on pork prices. Whereas in Indonesia, prices softened marginally on lower administered prices.

● Our assesment of Thailand’s inflation remains unchanged, with the inflationary pressure expected to be benign, growing between 0.5-1.0% in 2019 (2018: 1.1%), against the backdrop of cooling global growth and the ongoing US-China trade dispute, which may weigh on domestic activities. As the inflation is envisaged to register below BoT’s target range for most of the remaining months of 2019, coupled with looming domestic political risk and enhanced dovish rhetoric portrayed by the BoT, we believe the central bank will maintain an accommodative monetary policy. Nonetheless, we do not foresee a rate cut this year, given limited policy space and continued resilience in the private consumption activities.

Source: Kenanga Research - 2 Jul 2019