As an inflation-targeting central bank, the BoT set a headline CPI inflation target of 2.5% +/- 1.5ppt from this year. Thai CPI inflation has averaged c.2.5% y/y
since 2000 and the +/-1.5ppt band is meant to address volatility in prices around the mid-point. Against this, inflation fell to -1.04% in April.
Softer domestic demand, low production costs (including subdued crude oil prices) and a fall in inflation expectations have increased the risks of prolonged
negative headline inflation.
Consensus forecasts for Q2- and Q3-2015 CPI inflation are -0.3% and 0.45%, respectively - below the lower end of
BoT's target inflation band, notes Standard Chartered.
Prolonged negative inflation has two implications:
- (1) Thai fixed income assets may continue to benefit from high forward real yields.
- (2) the BoT will not be in a hurry to normalize policy.
