Thailand inflation worrisome but still manageable

Price pressures are mounting though not enough to force interest rate hikes this year, said RBS.

"Inflationary pressures will remain manageable and that no interest hike should be expected before 2013," according to RBS analyst Erik Leuth, in his emerging markets report. He cited a slew of reasons why the spectre of inflation associated with the flood recovery will not weigh down the economy, as expected.

"By end-June production facilities should be back to normal limiting supply-side price pressures. Demand is driven by investment that eases supply bottlenecks. Once factories are restored, there should be enough capacity to meet demand. This follows from growth accounting and by observing peers' GDP," he said.

"Inflation is falling and well within the Bank of Thailand's target band. Producer prices and prices for construction materials are softening. In the agricultural sector the floods affected goods, such as fruits and vegetables, with short production cycles. Raw food inflation is falling. The FY2012 budget is not very expansionary and most (off-budget) projects for flood prevention and water management will not start before 2013," he added.

"Budget execution caught up with budget only in March (mid-FY). Revenues are behind budget, but that's due to weak growth, not stimulus. The policy rate is in accommodative territory, but only mildly so. Exchange rate pass-through is low. Hikes in the minimum wage could be passed on to prices, but overall wages were falling just prior to the April raise," he said further.

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