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Thailand Economy
Pre-emptive rate hike as domestic economy remains robust
Summary
• The BoT raised its policy rate by 25bp to 2%, despite inflation remaining
unchanged from the previous month. Domestic demand is still robust, and we
expect domestic demand to push real GDP growth to 5.2% YoY for 2011.
Fundamentals
• The Bank of Thailand (BoT) raised rates by 25bp to 2% yesterday (1
December), surprising the market (we had expected a hike by the end of 2010,
but this move came a month ahead of our forecast). CPI inflation for November
was unchanged at 2.8% YoY, as was core inflation at 1.1% YoY, placing it
comfortably within the monetary policy target range of 0.5-3.0%. The slight rise
in food inflation (5.8% YoY in November, 5.5% YoY in October) was
mitigated by a decline in transport inflation (0.9% YoY in November, 1.5%
YoY in October). The BoT statement suggests that rates are being raised preemptively, as it forecasts inflation to rise with strong domestic demand in 1H11.
• Manufacturing production experienced a broad-based deceleration for the
seventh consecutive month to 6.2% YoY for October (8.1% YoY for
September). The BoT’s private investment index expanded by 17.4% YoY for
October (20.1% YoY for September), suggesting that fixed investment will
remain strong in 4Q10 as well. The BoT’s private consumption index
moderated to 2.3% YoY for October, but consumer confidence remains robust
and we expect private consumption and investment to drive Thailand’s
economic growth in 2011.
• Thailand’s monthly trade surplus narrowed to US$2.4bn in October (US$3.2bn
in September), as both exports (16.6% YoY for October) and imports (13%
YoY for October) decelerated. The Thai Baht has appreciated 9.5% in the yearto-date and higher interest rates will cause further appreciation, in our view. We
expect higher interest differentials to also lead to increasing capital flows into
Thailand, despite the implementation of a 15% withholding tax on capital gains
and interest payments (equalizing the tax treatment of foreigners and locals).
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