Deflationary pressures persist in Thailand

Thailand's headline consumer price inflation closed 2015 at -0.9% y/y, recording the 12th consecutive month of deflation. Prices are expected to continue to decline at least until the second quarter of 2016 after which inflation will likely pick up moderately to around 1.5% y/y by the end of the year. Meanwhile, core inflation remains in positive territory, at 0.7% y/y in December. 

Thailand's modest economic growth is underpinned by domestic spending and tourism while merchandise exports continue to record lackluster performance due to weaker demand in China and ASEAN economies. 

"We expect Thailand's real GDP to expand by slightly over 3% this year following an estimated 2.7% expansion in 2015. Given the challenging economic outlook and muted inflationary developments, we think that the Bank of Thailand may opt to reduce the benchmark interest rate one more time in the first half of the year, taking it to 1.25% from the current level of 1.50%", notes Scotiabank.

The most recent monetary easing action took place in April 2015 when the policy rate was reduced by 25 basis points. Nevertheless, a high level of household debt (equivalent to around 85% of GDP) will prevent any substantial monetary easing. Investor sentiment toward Thailand is adversely impacted by uncertainty regarding the timing of the next election. The country is not expected to return to democracy before 2017.