Weak domestic demand keeps inflation subdued in Thailand

Thailand's core inflation came in at a two-year low of -0.7% (YoY) in Dec15. Core inflation is likely to remain soft in the coming months and this would translate to only a gradual lift to headline inflation in 2016. More importantly, the downward trend in core inflation also suggests that weak domestic demand persists in the economy. 

That domestic demand remains weak is the key reason why the economy struggles to grow. Private consumption growth is expected to tick up to 2.3% in 2016, up from 2.1% last year. There is still no indication of a surge in consumption anytime soon, with the consumption and retail sales indices pretty much running sideways. Households are continuing to deleverage, which is also evident in how growth in household debt has eased throughout 2015. 

"Implication on monetary policy seems clear to us. Bank of Thailand (BOT) will maintain its accommodative policy stance for now. This includes staying tolerant of a soft currency. Until GDP growth momentum is back in the 3.5-4.0% range, we don't expect any policy normalization from the BOT", says DBS Group Research.