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Inflation ReportJuly 2011
The Inflation Reportis prepared quarterly by staff of the Bank of
Thailand with the approval of the Monetary Policy Committee (MPC). It
serves two purposes: (1) to provide a clear forward-looking framework for
economic and inflation forecasting to assist the MPC in making monetary
policy decisions and (2) to give the MPC an opportunity to present the
explanation for their decisions on various policy issues to the public.
Although individual MPC members may have differing opinions
regarding the assumptions on which the forecasts are based, as a group they
are in agreement with the forecasts on the outlook for inflation and output as
well as the risk factors involved as illustrated in the fan charts.
The Monetary Policy Committee:
Mr. Prasarn Trairatvorakul Chairman
Mrs. Atchana Waiquamdee Vice Chairman
Mrs. Suchada Kirakul Member
Mr. Ampon Kittiampon Member
Mr. Praipol Koomsup Member
Mr. Siri Ganjarerndee Member
Mr. Krirk-krai Jirapaet Member
Inflation Report July 2011
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Thailand Monetary Policy Strategy
Monetary Policy Formulation
The Monetary Policy Committee (MPC) sets monetary policy in
order to attain price stability conducive to sustainable economic
growth. The MPC also monitors factors contributing to external
stability and financial imbalances.
The Monetary Policy Instrument
The MPC utilizes the 1-day bilateral repurchase transaction rate
as the key policy rate to signal the monetary policy stance.
The Target
The MPC uses core inflation (excluding raw food and energy)
as its policy target with the range of 0.5-3.0 percent (quarterly
average). In the event that the target is missed, the MPC is
required to explain the reasons thereof to the public.
Forecasting Tools
To assist the MPC in making monetary policy decisions, theBank of Thailand has developed a macroeconomic model to
forecast economic conditions and inflation outlook. The model
is also employed to evaluate the impact of various factors on
the economy and to offer guidelines for appropriate monetary
policy responses.
Inflation Report July 2011
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Contents
1. Overview 1
2. Inflation and Economic Conditions 9
Inflation trends 9
Production cost conditions 11
Pass-through from cost to final prices 12
Aggregate demand in 2011 Q1 and the outlook for 2011 Q2 14
Production and supply in 2011 Q1 and the outlook for 2011 Q2 20
BOX: Soaring food prices and its implications on core inflation 26
3. Monetary Conditions and the Exchange Rates 29
Money market conditions 30
Banking system 35
Monetary base and money supply 39
Exchange rates 40
4. Financial Stability Conditions and Outlook 45
Non-financial corporate sector 45 Household sector 48
Real estate sector 49
Financial institutions 51
External Sector 54
5. Economic Growth and Inflation Outlook 57
Forecast assumptions 59
Output and inflation projections 66
Assessment of risks 71 Forecasts by research houses 77
BOX: Greece,s sovereign debt crisis and its impacts
on the global economy 79
6. Conclusion 83
Report: Economic/Business Information Exchange Program
between the Bank of Thailand and the Business Sector 85
Inflation Report July 2011
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1Inflation Report July 2011
Industrialized economies expanded more slowly
than expected during the first half of 2011. For the U.S.
economy in particular, key downside pressures came
from elevated oil prices as well as supply disruption
especially in the automobile industry due to Japan,s
natural disasters, resulting in dampened growth
momentum. Moreover, the FOMC announced in June
to discontinue its medium- and long-term governmentsecurities purchase of 600 billion U.S. dollars
(Quantitative Easing II: QE II), while still maintaining its
monetary policy stance accommodative to support the
U.S. growth. The euro area economy, on the other
hand, continued to expand led by core countries
especially Germany, but would likely remain plagued
by their sovereign debt concerns over the period ahead.
Meanwhile, the Japanese economy gained a firmerfooting and would likely pick up during the latter half
of this year, thanks to the Japanese government,s fiscal
stimulus that would soon enter into the economy. Asian
countries, growth continued to strengthen thanks
to robust domestic and external demand. With inflation
pressures building up persistently, many Asian coun-
tries would likely tighten their monetary policy, and this
could restrain growth to some extent.
Over the past three months, the Monetary Policy
Committee (MPC) observed that:
1. In the first quarter of 2011, the Thai economy
continued to grow firmly by 3.0 percent over the same
period last year, slightly moderated from 3.8 percent in
the preceding quarter. This translated into a strong 2.0
1. Overview
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2 Bank ofThailand
percent growth on a quarterly basis, up from 1.3
percent in the previous quarter. The momentum owed
largely to accelerated exports for both industrial and
agricultural products, thanks to the global economic
recovery led by emerging market countries. In addition,
strong domestic demand also added to the momentum.
After contracting in the second half of 2011,
private-sector investment rebounded on account of
higher machinery and equipment investment. Private
consumption also continued to edge higher mainly
from spending on durable goods, well-supported by
favorable income and employment conditions despite
the widespread flood that weakened consumer
confidence to some extent. Lastly, public investment
continued to lend further support to growth.
Table 1.1 GDP at 1988 prices (seasonally adjusted)
Change from the previous period
2010 2011
(Percent)2010
Q1 Q2 Q3 Q4 Q1
Domestic demand 1/ 6.1 1.5 2.6 -0.6 0.9 1.9
Private consumption 4.8 0.7 2.3 -0.3 1.2 0.6
Private investment 13.8 4.2 6.2 -0.3 -0.6 7.0
Public expenditure 6.4 1.5 -0.5 -1.3 3.1 -0.3
Net exports of goods and services -2.8 6.4 -0.1 -16.4 21.3 13.3Exports of goods and services 14.7 4.8 2.3 -3.6 6.2 10.9
Imports of goods and services 21.5 4.2 3.2 0.5 2.1 10.1
Gross domestic product 7.8 3.1 -0.1 -0.3 1.3 2.0
Note: 1/Domestic demand excluding changes in stocksSource: National Economic and Social Development Board
Recent data in April and May indicated that the
Thai economy continued to expand in 2011 Q2 on the
back of strong domestic demand. Private consumption
grew robustly in line with farm income growth and strong
employment conditions, further supported by credit
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3Inflation Report July 2011
expansion driven by low interest rates. On the other
hand, private investment and exports were likely to
subside owing in part to supply disruption in the
automobile industry due to Japan,s natural disasters. The
adverse impact of the supply disruption, however, should
be temporary.
2. Going forward, the MPC views major risks to
growth to come mainly from the external front as
follows. (1) Trading partners, growth, especially in
developed countries, may be fragile. Significantconcerns remain over the U.S. real estate market and
unemployment, as well as the financial institutions and
sovereign debt problems in the euro area that may spread
out to other countries. (2) Persistently high oil prices in
the global market may drive up domestic retail oil prices,
which will undermine income and private spending and
dampen growth overall. Lastly, (3) international capital
flows may be highly volatile given the uneven global
economic growth, which may lead to higher uncertainty
and volatility in the global economic landscape.
Chart 1.1 GDP growth forecast
Note: The fan chart covers 90 percent of the probability distribution.
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
14
12
10
8
6
4
2
0
-2
-4
-6
-8
14
12
10
8
6
4
2
0
-2
-4
-6
-8
Annual percentage change
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4 Bank ofThailand
Given the assessment of risk factors and the
outlook on the global recovery, the MPC projects the
Thai economy to sustain its growth momentum well
going forward. The MPC keeps its growth forecast for
2011 unrevised at 4.1 percent, driven mainly by robust
exports and domestic demand. Output growth is then
forecast to be 4.2 percent in 2012, also unchanged from
the previous projection. Despite the Thai economy,s
potential to expand at a pace even faster than this,
significant risks remain due to both external factors and
uncertainties surrounding the new government,s
policies.
3. Thailand,s overall financial stability remained
sound and supportive to the ongoing domestic
expansion. Both domestic and global economic
recovery helped strengthen financial positions of
businesses, as reflected in their solid profitability and
debt-servicing ability. But over the period ahead,
businesses will need to cope with heightened pressures
due to rising production costs, partly attributable to the
new government,s plan on minimum wage raise. In
addition, uncertainties in the global economic recovery
may also affect Thailand,s exports in the near future.
On the other hand, strong income and employment
prospects will continue to strengthen households,
financial health, though with some threats from
uncertainties in the global economy that may weigh on
exports, farm income, and households, income. The
MPC will also closely monitor the new government,s
fiscal stimulus, which may affect household spending
and debt accumulation in the longer term. At the same
time, domestic stability remained sound with no signs
of imbalances in the real estate sector, also with
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5Inflation Report July 2011
financial institutions, strong health as reflected in their
performance and balance sheets. External stability also
remained firm thanks to the continued balance of
payments surplus.
Inflation outlook and monetary policy
Headline inflation stood at 4.10 percent in 2011
Q2, picking up from 3.01 percent in the previous quarter
in all components. Prices of fresh food, in particular,
edged higher in line with rising production costs and
unfavorable weather conditions, while energy prices rose
with the global oil prices. Meanwhile, core inflation
also ticked up from the previous quarter to 2.37 percent,
following prices of food and beverages that surged in
line with rising costs of fresh food as well as seasonings
and condiments. Moreover, rising demand from robust
domestic growth also pressured core inflation to the
upside.
Looking ahead, the MPC projects price pressures
to build up strongly with greater pass-through from
soaring production costs to consumers, rising demand
and cost pressures, as well as higher inflation expecta-
tions. In addition, the forthcoming termination of the
30-baht diesel price pegging at the end of 2011 Q3 will
likely boost inflation in energy prices and related
components.
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6 Bank ofThailand
Major upside risks to inflation are still from: (1)
higher-than-expected oil prices because of the global
crude supply shortage due to unrests in the Middle East
and North Africa; and (2) accelerated commodity prices
possibly driven by supply shocks due to natural
disasters and global demand growth resuming back to
its normal trend. On the contrary, downside risks to
inflation include: (1) lower outturns of oil and
commodity prices due to mild impact of natural
disasters, protracted global recovery, or the slowdown
in emerging market economies; (2) early resolution of
political tensions in the Middle East and North Africa,
which will alleviate concerns on crude supply; and (3)
the possibility that the government may extend part of
its subsidy measures beyond the scheduled termination
at the end of December 2011.
In light of assessment of pressures and risks to
inflation above, the MPC projects headline inflation
in 2011 and 2012 to stage at 3.9 and 3.2 percent,
Chart 1.2 Consumer Price Index
Note: 1/Consumer Price Index excluding raw food and energy itemsSource: Trade and Economic Index Bureau, Ministry of Commerce
-6
-4
-2
0
2
4
6
8
10
Apr Jul Oct Apr Apr Apr Jul Jul
Jun
Oct OctJan
2008
Jan
2009
Jan
2010
Jan
2011
Core inflation
target rangeAnnual percentage change
Core inflation1/
Headline inflation 4.06
3.0
0.5
2.55
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7Inflation Report July 2011
respectively, unchanged from the previous projection.
Core inflation in 2011 and 2012 is expected to average
at 2.4 and 2.3 percent, respectively, up from the
previous forecast given the heightened price pressures
from both demand and supply factors. With regard to
the new government,s stimulus plans, the MPC judges
that these plans may threaten domestic economic
stability in the short term during the initial period of
adjustment, especially in case that high growth drives
up inflation well above the baseline scenario.
Chart 1.3 Core inflation forecast
Note: The fan chart covers 90 percent of the probability distribution.
With regard to monetary policy, the MPC, in its
meeting on June 1, 2011, assessed the global growth
momentum to sustain despite some drag due to recentdisasters in Japan through regional supply chains. At
the same time, the Thai economy continued to expand
well on the back of robust external and domestic
demand. Domestic price pressures built up persistently
with steepening production costs and would likely
continue to pick up over the period ahead, with
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
5
6
4
3
2
1
0
-1
5
6
4
3
2
1
0
-1
Annual percentage change
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8 Bank ofThailand
inflation expectations rising gradually in line with
greater pass-through from costs to retail prices. The
MPC, therefore, decided unanimously to raise the policy
interest rate by 25 basis points, from 2.75 to 3.0 percent.
Then in its subsequent meeting on July 13, 2011, the
MPC judged major industrialized countries to moderate
somewhat during the first half of 2011. The U.S. economy
suffered notably from elevated oil prices and supply
disruption in the automobile sector due to Japan,s
natural disasters. These pressures, however, should ease
during the second half of the year. On the other hand,
the euro area economy continued to grow led by growth
in core countries, although sovereign debt concerns
would likely remain burdensome over the period ahead.
Along with strengthened growth in Asia, the Thai
economy sustained its growth momentum on the back
of domestic demand and exports, with further support
from fiscal stimulus. Meanwhile, inflation pressures
remained elevated along with high prices of oil andprepared food. Over the period ahead, the new
government,s plans on minimum wage raise and
spending boost would likely add more upward
pressures to inflation amid strong domestic growth,
possibly leading to higher inflation expectations as well.
The MPC, accordingly, decided unanimously to raise
the policy interest rate by another 25 basis points, from
3.00 to 3.25 percent.
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9Inflation Report July 2011
2. Inflation and Economic Conditions
Inflation trends
Trading partners, inflation
During the first two months of 2011 Q2, the
inflation in Thailand,s trading partners, economies
accelerated from the previous quarter, owing to
commodity prices that remained elevated, coupled with
continued demand growth supportive of pass-through
of production costs to final prices. Such development
could also be witnessed in Thailand.
Domestic inflation
Headline inflation rose to 4.10 percent in 2011
Q2, accelerating from the previous quarter in all
components including core inflation, raw food, and
energy prices. In the case of raw food, the acceleration
in prices of eggs, dairy products, meats, poultry and
fish was due to higher costs of animal feeds and
Chart 2.1 Inflation in Thailand and other countries
Source: Various official sources and Bloomberg
The acceleration of
Thailand, s trading
partners inflation
resulted from
commodity prices that
remained elevated
coupled with continued
demand growth.
Headline and core
inflation stood at 4.10
and 2.37 percent,
respectively in 2011 Q2,
accelerating from the
previous quarter.
-3
0
3
6
9
-4
-2
0
2
4
6
Annual percentage change
May May
Malaysia (3.3)
Singapore
(4.5)
Philippines
(4.5)
-5
0
5
10
15
-6
-4
-2
0
2
4
6
8
10
2008 2009 2010 2011
2008 2009 2010 2011
2008 2009 2010 2011
2008 2009 2010 2011
Jun (4.06)Thailand
Indonesia(6.0)
ChinaMay (5.5)South Korea
Jun (4.4)
Taiwan
May (1.7)
US (3.6)
EU-12(2.7)
Japan (0.3)
Trading partners (22)
May (3.5)
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10 Bank ofThailand
unfavorable weather conditions. Meanwhile, higher
domestic retail gasoline prices and the increase in
electricity charge for the period of May to August 2011
contributed to rising energy prices.
Table 2.1 Quarterly inf lation
2010 2011
Unit: Percent 2010
Q2 Q3 Q4 Q1 Q2
Percentage change from the previous year (%YoY)
- Headline Consumer Price Index 3.3 3.3 3.3 2.8 3.01 4.10
Core Consumer Price Index 1.0 0.9 1.2 1.2 1.46 2.37
Raw food 10.3 9.2 13.8 10.2 8.27 9.06
Energy 9.7 10.9 1.5 3.2 5.21 7.92
Percentage change from the previous quarter (%QoQ)
- Headline Consumer Price Index - 1.0 0.6 0.2 1.2 2.1
Core Consumer Price Index - 0.4 0.2 0.2 0.7 1.3
Raw food - 4.0 3.4 -0.8 1.5 4.7
Energy - 0.5 -2.2 2.4 4.6 3.0
Source: Trade and Economic Index Bureau, Ministry of Commerce.
Chart 2.2 Contribution to inflation
Source: Trade and Economic Index Bureau, Ministry of Commerce, and calculationsby Bank of Thailand.
Core inflation was at 2.37 percent in 2011 Q2,
rising from the previous quarter as a result of the strong
pass-through into prices of food and beverages. This
development was due to the surge in costs of raw food
0
-2
-4
2
4
4
3
2
1
0
-1
-2
6
8Percent Percent
Q12008
Q12008
Q12009
Q12009
Q12010
Q12010
Q12011
Q12011
Core inflation
Energy
Raw food
Non-food and beverages
food and beverages
Headline inflation
Contribution to headline inflation Contribution to core inflation
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11Inflation Report July 2011
and condiments, coupled with strong domestic demand
in line with economic expansion. Meanwhile, the non-
food and beverage inflation edged lower owing to the
base effect i.e. the disappearance of a positive
contribution from last April,s termination of the
government,s subsidy on water charges. As for other
goods and services, prices also began to increase but
only slightly. Going forward, inflation trend will likely
remain high due to the pressures from high production
cost, strong demand, and firm,s cost and inflation
expectations.
Production cost conditions
Raw material cost
In 2011 Q2, global oil prices continued an upward
trend from the previous quarter thanks to the ongoing
expansion in global demand and concerns over supply
disruptions as a result of the unrests in the Middle East
during the beginning of quarter. However, global oil
Overall production
costs accelerated from
the previous quarter,
reflecting in higher
global commodity
prices, manufactured
products in PPI, and
labor cost.
Chart 2.3 Production cost conditions
Source: Bloomberg and Food and
Agriculture Organization of
United Nation.
Source: Trade and Economic Index Bureau,
Ministry of Commerce, and
calculations by Bank of Thailand.
100
80
25
20
15
10
5
0
-5
-10
-15
60
40
20
0
-20
-40
-60
Percent
World food price Dubai oil priceProducer price index : Manufactured products
Producer price index : Products of Agriculture
Producer price index
Producer price index : Mining products
Annual percentage change
World commodity prices Producer price index
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2008
Q1
2009
Q1
2010
Q1
2011
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12 Bank ofThailand
prices edged lower during mid-quarter in line with the
depreciating trend in the U.S. dollar and concerns over
the global economic recovery due to the weaker-than-
expected U.S. economic figures and higher risk of a
more prolonged European sovereign debt problem.
Meanwhile, world food prices continued to accelerate,
owing to the pick-up in cereal prices while prices of
meat and dairy products remained elevated.
Producer Price Index (PPI) inflation dropped
slightly to 5.8 percent in 2011 Q2 as prices of agriculturalproducts decreased, mainly from prices of vegetables.
Meanwhile, the prices of mining and manufactured
products accelerated in line with steepening prices of
food, beverage and tobacco, textiles and textile products,
chemicals and chemical products, and transport
equipments. Such development reflected the higher cost
pressures from the non-food and beverage component.
Labor cost
Labor market data of 2011 Q1 reflected higher
pressure of labor cost as wages rose in line with the
continued economic expansion. As a result, labor market
conditions tightened, contributing to an increase in
average earnings from the same period last year. Unit
labor cost also edged higher, implying that labor
productivity could not catch up with the increase in
wages.
Pass-through from cost to final prices
The strong pass-through in the food and
beverages category in the first half of 2011 is likely to
soften during the remainder of the year as the increases
in world food prices and prices of agricultural products
Going forward, the
pass-through in the
non-food and beverages
group is likely to
increase in line with
pressures from higher
cost, solid demand, and
inflation expectations.
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13Inflation Report July 2011
in PPI begin to slow, reflecting subsiding pressure on
costs of food inputs.
On the other hand, PPI for manufactured products
continued to increase though the pass-through to finalprices in the non-food and beverage category has been
limited. Going forward, cost pressures is likely to
increase due to 1) the decrease in various energy price
subsidies ranging from the lifting of the cap on diesel
price at 30 baht per liter in September 2011, the plan to
gradually float LPG price to the increases in electricity
charge for the industrial sector albeit moderate global
commodity prices, and 2) pressures from higher labor
cost and strong demand growth, supported by the new
government,s policies such as an increase in minimum
wage and civil servants, salary, the agricultural products,
pledging scheme, and other stimulus policies. Moreover,
firms, production cost and inflation expectations will
likely enable the higher pass-through from cost to final
prices in the periods ahead.
Source: National Statistical Office.
Chart 2.4 Labor wage condition
Average earnings Unit labor cost
Note: Unit labor cost = Labor compensation/GDPSource: National Statistical Office and National
Economic and Social DevelopmentBoard, and calculations byBank of Thailand
10,000
9,500
2011 2010 2009
9,000
8,500
8,000
Bath per month20
15
10
5
0
-5
-10
% change from the same period last year
Q12008Ja
n
Fe
b
Mar
Ap
r
Ma
y
Ju
n
Jul
Au
g
Se
p
Oct
No
v
De
c Q12009
Q12010
Q12011
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14 Bank ofThailand
Aggregate demand in 2011 Q1 and the outlook
for 2011 Q21/
The Thai economy in 2011 Q1 continued its
momentum and grew at 2.0 percent over the previous
quarter. The economy was propelled by positive
developments in both domestic and external demand.
Robust expansion of private investment by 7.0 percent
contributed significantly to growth in this quarter. In
addition, exports of goods and services continued to
expand by 10.5 percent, which was the highest quarter-on-quarter growth in ten years.
In 2011 Q2, the exports of goods and services
decelerated from a high growth in the previous quarter,
partly due to the slowdown in automobile production
and exports caused by Japan,s natural disasters.
Nevertheless, this impact is expected to be only
temporary, and improved gradually by the end of this
Table 2.2 GDP growth rate
Change from the previous quarter 2009 2010 2011
(seasonally adjusted, percent) Q3 Q4 Q1 Q2 Q3 Q4 Q1
GDP 2.2 3.7 3.1 -0.1 -0.3 1.3 2.0
Domestic demand 1.5 2.1 1.5 2.6 -0.6 0.9 1.9
Private consumption 1.2 2.1 0.7 2.3 -0.3 1.2 0.6
Private investment 2.8 3.4 4.2 6.2 -0.3 -0.6 7.0
Government consumption 3.9 3.7 1.5 -0.5 -1.3 3.1 -0.3
Public investment -2.4 -4.7 1.6 0.7 -3.0 -2.1 3.0
Exports of goods and services 7.0 6.9 4.5 2.4 -2.3 4.8 10.5
Imports of goods and services 3.6 11.8 4.6 3.1 0.3 2.0 10.1
Source: The National Economic and Social Development Board and calculationsby the Bank of Thailand
1/ Data used in assessing aggregate demand in 2011 Q1 were obtained from the NationalEconomic and Social Development Board. Economic indicators used in assessing the 2011Q1 developments and the outlook for 2011 Q2 were obtained from the Bank of Thailand,except for data on government expenditure, which originated from the Comptroller General
,s
Department and were compiled by the Fiscal Policy Office.
In 2011 Q1, the Thai
economy expanded
from the previous
quarter, thanks to both
domestic and external
demand.
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15Inflation Report July 2011
quarter. Overall, the outlook for the economy in 2011
Q2 is expected to grow from the previous quarter. The
growth momentum would be mainly driven by domestic
demand, particularly from continued expansion of private
consumption.
Total exports in 2010 Q4 accelerated by 10.5
percent from the previous quarter. Merchandise exports
gained in all categories, with exports of agricultural
products driven up by rice exports. Meanwhile, exports
of resourced-based products expanded in line withexports of rubber products and prepared food. High-
technology exports remained robust, particularly for
plastic products and electrical appliances. The exports
of automobiles also expanded, as the impact of Japan,s
disasters was not evident this quarter thanks to
manufacturers, inventory accumulation in earlier periods.
In addition, exports of labor-intensive goods excluding
gold gained in almost all categories. Lastly, exports of
services expanded in line with rising tourism revenue.
Exports of goods and
services continued
to grow in 2011 Q1,
but are likely to slow
down in 2011 Q2 due
to Japan, s natural
disasters.
Source: The Bank of Thailand
Chart 2.5 Export volume index classified by products
(3-month moving average)
anuary 2008 = 100
120
130
110
100
90
80
70
60
Jan2009
Jan2010
Jan2011
Apr Apr Apr Jul Jul
Export volume index (including gold)
Resource-based products
Technological products
Agricultural products
Labour-intensive products (excluding gold)
Oct Oct
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16 Bank ofThailand
However, exports in 2011 Q2 are expected to
decelerate from the previous quarter, partly due to the
slowdown in exports of automobiles caused by Japan,s
supply chain disruption. However, the situation started
to improve by the end of May. Exports of automobiles
and parts were then expected to recover to its normal
level starting from 2011 Q3 onwards. In addition, exports
of services were expected to decline from a high growth
in the previous quarter.
In 2011 Q1, private consumption expanded by3.4 percent over the same period last year, decelerating
from the previous quarter partly due to the impact of
widespread flood on consumers, spending and
confidence. Nevertheless, private consumption still
managed to grow by 0.6 percent over the previous
quarter, mainly due to consumption of durable goods.
This expansion was reflected in commercial car sales
remaining at high level, and rising automobile leasing
provided by financial institutions. Meanwhile,
consumption of non-durable and semi-durable goods
decelerated from the previous quarter.
Private consumption is likely to grow further in
2011 Q2, with support from high income, strong
employment, and expansion of private credits. The
support is partly reflected in rising farm income in line
with agricultural prices, low unemployment, as well asrising credit to household. However, consumption of
durable goods was likely to soften as a result of rising
interest rates, and higher inflationary pressures.
Consumption of automobiles was also anticipated to
moderate due to Japan,s supply chain disruption.
Meanwhile, private investment expanded by 12.6
percent in 2011 Q1 over the same period last year,
Private investment in
2011 Q1 accelerated
from the previous
quarter, but expected tostabilize in 2011 Q2.
Private consumptioncontinued to grow in
2011 Q1, and was
poised to continue into
2011 Q2, supported by
high income, strong
employment and
expansion of private
credits.
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17Inflation Report July 2011
accelerating by 7.0 percent from the previous quarter.Investment in machinery and equipment expanded from
imports of machinery related to export-oriented
industries such as electronics, automobiles, and electrical
appliances. Moreover, investment in construction sector
remained robust, partly due to the housing construction
and repairs after the flood. Domestic commercial car
sales also continued to grow, with strong support from
Source: The National Economic and Social Development Board and calculationsby the Bank of Thailand
Chart 2.6 Contribution to private consumption expenditure(PCE) growth (QoQ, seasonally adjusted)
Percent
Q1
2009
Q1
2010
Q1
2011
3
2
1
0
-1
-2
-3
Services
Non-durablesSemi-durablesDurables
PCE
Chart 2.7 Business Sentiment Index and Private Investment Index
Source: The Bank of Thailand
Index Index
Private Investment Index (RHS)
Business Sentiment Index
May205.8
50.9
60 215
195
205
185
175
165
155
145
55
50
45
40
35
30
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul JulOct Oct
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18 Bank ofThailand
higher confidence and expanding commercial bank
credits to the business sector.
However, private investment is expected to
stabilize in 2011 Q2. The Private Investment Index (PII)
levels in April and May were slightly lower than the
average level recorded in 2011 Q1. This was partly
reflected in decelerating commercial car sales caused
by supply chain disruption since mid quarter. Investment
in machinery and equipment is anticipated to grow
moderately from the previous quarter as industriesalready stepped up their machinery imports in order to
expand their production capacity in prior period.
Nevertheless, investment in the construction sector is
likely to grow further, thanks to rising construction areas
permitted in municipal zone especially housing and
commercial investment in Bangkok. Factors critical to
future investment decisions continued to be the rising
costs of production, price adjustment difficulties, and
economic and political uncertainties.
Chart 2.8 Import volume index classified by products
(3-month moving average)
Source: The Bank of Thailand
January 2008 = 100
140
130
120
110
10090
80
70
60
50
Jan2009
Jan2010
Jan2011
Apr Apr Apr Jul JulOct Oct
Import volume index
Capital goods
Raw material goods
Consumer goods
Fuel
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19Inflation Report July 2011
Positive developments in private consumption
and investment led total imports to grow by 10.1 percent
in 2011 Q1 over the previous quarter. Imports of
merchandise goods expanded in almost all categories,
particularly raw materials and intermediate goods such
as metal and metal products, electronic parts, and
industrial machinery. Furthermore, imports of capital
goods expanded in line with imports of drilling platforms,
while imports of fuel and lubricants rose along with
crude oil imports. Meanwhile, imports of services
accelerated from the previous quarter following tourist
expenditure. However, the overall imports of goods
and services in 2011 Q2 were expected to decelerate
from the previous quarter in line with the outlook of
domestic demand.
The overall government spending contracted in
2011 Q1 which was the second quarter of the fiscal
year, by 0.6 percent over the preceding period, partly
due to the speeding up of disbursement in the first
quarter of the fiscal year. However, the overall public
investment expanded from the previous quarter, owing
mainly to the investment made by state enterprises.
Constructions by state enterprises improved from the
previous quarter partly owing to the ongoing projects,
for example: the Purple Line city train (Bang Yai _ Rat
Burana) of Metropolitan Rapid Transit Authority, the Red
Line city train (Bang Sue _ Taling Chan) of the State
Railway of Thailand, Baan-Aue-Ar-Thorn project phases
3 _ 5 of National Housing Authority, and expressway
extension phase 3 of the Expressway Authority of
Thailand. Besides, investment in machinery and
equipment by state enterprises expanded along with
the imports of a commercial aircraft by Thai Airway
Imports gained in
almost all categories
in 2011 Q1, butare anticipated to
decelerate in 2011 Q2.
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20 Bank ofThailand
International Public Company, and imports for system
set-up of the Integrated Billing and Customer by CAT
Telecom Public Company Limited.
3/ Data used in assessing aggregate supply in 2011 Q1 were obtained from the National Economicand Social Development Board. Economic indicators used in assessing the 2011 Q1developments and the outlook for 2011 Q2 were computed by the Bank of Thailand, exceptdata on the number of tourists and the occupancy rate, which were in part compiled by theTourism Authority of Thailand. Data on the labor market were obtained from the NationalStatistical Office.
Production and supply
expanded from the
previous quarter, but
are expected to stabilize
in 2011 Q2.
Note: Excluding principal repayments and replenishments of the treasury reserve.Source: The Comptroller General,s Department, Ministry of Finance
Chart 2.9 Disbursement of government budget
Government spending is expected to increase in
2011 Q2 from the same period last year, in line with
higher disbursement rate and disbursed amount.
Moreover, the disbursement of budget related to
government measures is also anticipated to increase,
particularly the subsidies for civilians affected by floods
in 2010, and financial aids for the elderly.
Production and supply in 2011 Q1 and the
outlook for 2011 Q23/
The overall production and supply grew by 2.0
percent in 2011 Q1 over the previous quarter, accelerating
from 1.3 percent in 2010 Q4. The expansion took place
Billion baht
250
200
150
100
50
0Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2010 Budget 2011 Budget
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21Inflation Report July 2011
in all sectors, in particular the manufacturing production
which expanded in line with external demand.
Meanwhile, agricultural output also improved from the
previous quarter, which was affected by unfavorable
weather conditions as well as flooding situation.
The production and supply are expected to grow
moderately in 2011 Q2 over the same period last year.
However, the quarter-on-quarter growth is anticipated
to be unchanged, partly due to a contraction of
automobile production caused by Japan
,
s supply chaindisruption as well as a lower agricultural output from
early harvesting in the previous quarter.
M a n u f a c t u r i n g production edged
higher in 2011 Q1, but
is expected to contract
in 2011 Q2, partly due
to the impact of Japan,s
natural disaster.
Chart 2.10 Contribution to GDP growth(QoQ, seasonally adjusted)
Source: The National Economic and Social Development Board
0
-5
-6
-4
-3
-2
-1
1
2
4
3
GDP
Q12008
Q12009
Q12010
Q12011
Agriculture Manufacturing
Trade Services
Others
Percent
Manufacturing production accelerated by 1.6percent in 2011 Q1 over the preceding quarter. Industries
that rely on both domestic and export markets expanded
in line with rising production of automobiles to
accommodate both domestic and external demand.
The production of automobiles was not affected by
Japan,s supply chain disruption this quarter, thanks to
manufacturers, inventory accumulation in earlier periods.
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22 Bank ofThailand
In addition, export-oriented industries expanded from
the previous quarter, following the production in
industries such as electronics and parts, and electrical
appliances. Meanwhile, the production of hard disk
drives declined from the previous quarter, given the
already-high level of inventory, and the downtrend in
demand. Nevertheless, domestic-oriented industries
slightly contracted from the previous quarter in line with
the declining production of petroleum, mainly due to
the temporary shutdown of some petroleum refineries
from February to March.
Source: The Office of Industrial Economics, Ministry of Industry
Chart 2.11 Manufacturing Production Index (MPI)
classified by market (3-month moving average, seasonally adjusted)
January 2008 = 100
120
110
100
90
80
70
60
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul Jul
MPI growth
Export-oriented industries (export > 60%)
Both domestic and export industries (export 30% - 60%)
Domestic-oriented industries (export < 30%)
Oct Oct
The outlook of manufacturing production in 2011
Q2 is likely to decline from the previous quarter. Thisis partly reflected in the average level of the seasonally-
adjusted Manufacturing Production Index (MPI) in the
first two months of 2011 Q2, which was lower than the
average level recorded in 2011 Q1. In April and May,
the production of automobiles was affected by supply
chain disruption as a result of Japan,s natural disasters.
Nevertheless, major car manufacturers expected to
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23Inflation Report July 2011
gradually increase their production by the end of this
quarter, and resume their normal production in 2011
Q3. Besides, production of hard disk drives is expected
to improve, as inventory level starts to decrease and
demand is likely to pick up gradually in the second half
of the year in order to accommodate the efficiencyimprovement of office computer.
Capacity utilization is likely to decline in 2011
Q2 from the preceding quarter following a drop of
production, particularly in automobile industry.
The services sector continued to expand in 2011
Q1. In this regard, the hotels and restaurants industry
grew by 4.6 percent over the previous quarter in linewith the rising number of tourists. Tourists from Japan
were slightly decelerated after the incident in March,
but the overall tourism sector remained robust.
Meanwhile, the seasonally-adjusted occupancy rate rose
to 56.5 percent in this quarter from 53.1 percent in 2010
Q4. Moreover, the expansion of the tourism sector led
to a modest growth in logistics and transportation services
of 1.2 percent over the previous quarter.
Chart 2.12 Capacity utilization rate (seasonally adjusted)
Source: The Office of Industrial Economics, Ministry of Industry
The services sector,
particularly tourism
and transportation,
continued to expand from the previous
quarter, but it is
expected to slow down
in 2011 Q2.
Percent
May
58.0
70
65
60
55
50
45
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul JulOct Oct
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24 Bank ofThailand
The services sector is expected to slow down in
2011 Q2. The seasonally-adjusted number of tourists in
April and May rose by 3.8 and 0.4 percent, respectively,
over the previous months. The occupancy rate was
also lower, with a seasonally-adjusted rate of 57.5 in
May. Nevertheless, the number of tourists is expected
to grow largely over the same period last year, as tourism
sector was affected by political turmoil in May 2010.
Chart 2.13 Number of foreign tourists and hotel occupancy rate(seasonally adjusted)
Source: The Tourism Authority of Thailand and the Bank of Thailand
Agricultural output grew by 10.1 percent in 2011
Q1 over the previous period, after contracting by 0.2
percent in 2010 Q4. The expansion contributed mainly
from second-crop rice output which was early cultivated
to make up for the damaged output caused by floods in
the previous quarter. Meanwhile, the output of sugar
cane reached the record-high, due to last year,s heavy
rain and encouraging price for growers to expand their
cultivated areas. Meanwhile, tightened supply in both
global and domestic markets, rising demand for bio-
fuels, as well as steady growth in the automobile industry
drove agricultural prices up significantly particularly
prices of rubber and oil palm.
Thousand persons
Hotel occupancy rate (RHS)
Number of foreign tourists
Percent
1,685
1,485
1,285
1,085
885
685
60
65
55
50
45
40
35
30
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul JulOct Oct
In 2011 Q1,
agricultural output
expanded well from the
previous quarter, but is
expected to contract in
2011 Q2.
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25Inflation Report July 2011
In 2011 Q2, agricultural output was expected to
contract from the previous quarter, owing mainly to the
decline in rice output from early harvesting in 2011 Q1.
Moreover, last year public campaign dissuaded second
cultivation of second-crop rice due to low level of water
in the dam. Major crop prices tended upward steadily
due to lowering supply, particularly for oil palm, shrimp,
and livestock. Nevertheless, price of rubber was
anticipated to slow down as Japan,s disasters led to the
global decline in automobile production, and, as a result,
lower demand for rubber.
4/ National Statistical Office started to collect monthly employment data since 2001.
Tight labor market
conditions will add toinflation pressures
going forward.
Chart 2.14 Unemployment rate (seasonally adjusted)
Source: The National Statistical Office, and calculations by the Bank of Thailand
Employment conditions continued to improve in
2011 Q1 from the previous quarter. In this regard, the
seasonally-adjusted unemployment rate was 0.6 percent
in April, the lowest since 20014/. Moreover, the
recruitment difficulty index in May stood at 38.3, still
reflecting labor shortage that will likely add to inflation
pressures over the periods ahead.
Percent
0.6
1.8
2.0
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul JulOct Oct
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26 Bank ofThailandBank ofThailand
Over the recent period, food prices, including both raw food and seasonings andcondiments rose substantially, causing higher pass-through to prices of prepared food. Theeffect was most notable during 2011 Q2, where prices of many prepared food items weremarked up. In April 2011, prepared food price rose by 2.6 percent over the previous month_ a new high record. This rate is considered high compared to its long-run average (since2000) of approximately 0.2 percent. Such a strong pass-through in turn resulted in anacceleration of core inflation from 1.5 percent in 2011 Q1 to 2.4 percent in 2011 Q2, partlyowing to a large share of food and beverages, totaling 24.4 percent in the Core ConsumerPrice Index basket. This scenario thus motivates the following questions: (1) what are themain factors affecting prepared food prices in Thailand?; (2) how can we explain the dynamicof food inflation; and (3) what are the implications on core inflation?
Factors affecting prices of prepared food in Thailand
Two steps can be taken inorder to find determinants ofprepared food prices. The first stepis to find an underlying factor thatexplains the costs of food preparation
via constructing the Common FactorIndex. This Index is calculated byextracting the Common Factorunderpinning the costs of variousprepared food inputs, including rawfood; namely meat, eggs and dairyproducts, rice, vegetables and fruits;and seasonings and condiments. Thestatistical method employed in thiscalculation is Principle Component
Analysis (PCA). The PCA-extractedcommon trend will then reflect thegeneral factor affecting the costs offood preparation and thus can bestexplain their variations.
The second step then is tofind the correlation between theCommon Factor Index and potentialfactors underlying the costs of foodpreparation. It is found that worldfood prices significantly affectThailand
,s prepared food prices
through their impact on the costs offood preparation. This relationship isreflected by the high correlationcoefficients between world foodprices and the Common Factor, the Common Factor and prepared food prices, and worldfood prices and prepared food prices during 2006-2011 of 0.46, 0.57 and 0.70, respectively(Chart 1).
Dynamic of food inflation
The speed at which food inflation will subsequently taper off depends on itspersistence. In other words, in the case of high persistence, when food inflation spikes upfrom a supply shock, it will take longer to adjust downwards relative to the case of lowpersistence. (Chart 2)
Soaring food prices and its implications on core inflation
Chart 1 Determinants of food inflation
Chart 2 Impact of a supply shock on inflationunder different degrees of persistence
Correlation 1995 - 2011 2000 - 2011 2006 - 2011
0.46 0.51 0.57
0.32 0.41 0.46
0.45 0.59 0.70
Common factor*
Common factor
Common factor and prepared food
Common factor and world food (1 quarter lag)**
Prepared food and world food (1 quarter lag)**
Prepared food price World food price
Thailand,s cost of food preparation is correlated with world food price
Principle Component Analysis
10 20
0
-20
-40
5
0
-5
% QoQ sa % QoQ sa
Meat RiceVegetables
and fruits
Seasoningsand
condiments
Eggs and
dairy
Q11995
Q11997
Q11999
Q12001
Q12003
Q12005
Q12007
Q12009
Q12011
Note: * The constructed common factor is able to explain approximately42.7 percent of the variation in the 5 variables** World food is proxied by the International Monetary Fund,s Food
IndexSource: Ministry of Commerce and calculations by Bank of Thailand
40
30
20
10
0Shock
Inflation
Low persistence
High persistence
Time
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27Inflation Report July 2011Inflation Report July 2011
Chart 3 Thailand,s inflation persistence
Chart 4 Impulse response of non-food inflation to a 1standard deviation innovation in food inflation
i=1
p
i=1
p
-2.0
Food
Food
Thailand (1995 - present)
Thailand (2000 - present)
World mean
World median
Food and non-food inflation persistence in 91 countries*
0.43 0.42
(Sum of Auto Regressive Coefficients)
0.37 0.33
0.182 0.021
0.243 0.000
Non-food
Non-food
Thailand = 0.33
Thailand = 0.37
30
25
20
15
10
5
0
-1.4 -0.7 -0.1 0.6 1.2
Note: * Walsh James, Reconsidering the role of food prices in inflation, IMFWorking paper (2011) whereby persistence is measured by the Sum
of Auto Regressive Coefficients
0.015
0.010
0.005
0.000
-0.005
-0.0102 4 6 8 10 12 14 16 18 2220 24
Percent
Quarters
1/ Using quarterly CPI data for food and non-food during 2000 - 2011 and employing 2 lags.2/ Using the equation where Dummy = 1 when there is high demand
pressure, i.e. the capacity utilization rate is higher than its average value since 2000, and Dummy = 0 otherwise.core,t= C +core,t-1+
3i=1 t-i+ Dummy
3i=1 t-i
A popular method in calculating
inflation persistence is to findthe Sum of AutoregressiveCoefficients (SARC) from the
equation t= +it-i+ ut, where
is the inflation rate and SARC=i. In the case of Thailand,inflation generally has a relativelyhigh persistence level compared toother countries, although it hasedged down since 2000 after theadoption of the Flexible InflationTargeting regime. In addition, thereis higher persistence in foodinflation compared to non-foodinflation (Chart 3). Upondisaggregating the overall food category into raw food and other food including preparedfood and seasonings and condiments, it is found that the persistence in food inflation ismainly caused by such other food. This fact may well reflect the gradual price adjustmentprocess of prepared food outlets/restaurants.
The pass-through of food to core inflation
Despite the fact that food priceshave a relatively high portion in theCore Consumer Price Index basketand food inflation itself is highlypersistent, the pass-through of foodto non-food inflation, evident from theimpulse response function of a typical
Vector Autoregressive Model (VAR)1/is not particularly obvious (Chart 4).This suggests that in the past, althoughincreases in food prices would speedup core inflation, the risk that coreinflation would increase continuouslyas a result of the pass-through of food
to non-food inflation was minimal. In other words, the second round effect of food inflationhas been quite low. However, during the present setting where the economy is expanding ata solid pace and demand pressure is strong, as reflected by the higher-than-average capacityutilization rate, a 1 percent increase in food inflation will pass-through to core inflation by0.05 percentage point more than when demand pressure is tame.2/
In summary, the large proportion of food in the Core Consumer Price Index basket implies
that food inflation dynamic is an important determinant of the overall inflation dynamic. Thisis reflected in the acceleration of core inflation during the previous periods. Moreover, althoughfood inflation has a rather high persistence level, past data indicates that the pass-through tonon-food inflation has not been obvious. In other words, the magnitude of the second roundeffect of food inflation is not large enough to sustain a continuous rise in core inflation.Nevertheless, when the economy is strong and demand pressure is high, the likelihood of alarger second round effect is estimated to be higher, potentially altering the inflation expectation.The BOT, therefore, places great emphasis on assessing developments and risks that canpotentially affect economic growth, inflation and inflation expectation in the periods ahead.
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29Inflation Report July 2011
3. Monetary Conditions and
the Exchange Rates
Following the release of the previous report, the
MPC judged in the meeting on June 1, 2011, that the
global economy moderated somewhat in the first
quarter of 2011 but still maintained its overall growth
momentum. The US economy showed signs that
rising inflationary pressure had begun to weigh on
consumption. The euro area was expected to maintain
its expansion but sovereign debt problems remained a
key risk to the economy. Meanwhile, the Asian economy
expanded well on account of both internal and
domestic demand. However, risks to global inflation
were expected to remain going forward. The Thai
economy grew well in the first quarter supported by
agricultural production and exports. Inflationary
pressure increased more than expected following hikesin the prices of prepared foods. As a result, there is a
risk that core inflation may breach the upper end of the
target that band in the future periods. The MPC
therefore decided unanimously to raise the policy
interest rate by 0.25 percentage points, from 2.75 to
3.00 percent per annum.
In the following meeting on July 13, 2011, the
MPC noted that the advanced economies expanded
more slowly than expected in the first half of the year.
The U.S. economy was particularly affected by the surge
in oil prices and supply disruption in the automobile
sector stemming from the Japan crisis which was
anticipated to abate in the latter half of the year. The
euro area continued to expand from growth in the core
member countries while sovereign debt problems
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30 Bank ofThailand
remained a key risk to the economy. The Asian economy
continued to grow from both internal demand and
exports. However, going forward, growth may slow
slightly due to monetary policy tightening to contain
inflation in many countries. The Thai economy
continued to expand in the second quarter primarily
from both internal and external demand as well as
continued fiscal stimulus. Inflationary pressure remained
high. In light of the continued risks to inflation amid
robust domestic demand, the MPC deemed it necessary
to continue increasing the policy rate and therefore
decided unanimously to raise the policy interest rate by
0.25 percentage points, from 3.0 to 3.25 per cent per
annum.
Money market conditions
Money market
Short-term money market interest rates forcollateralized lending in Thai baht edged higher in
2011 Q2 in line with the policy interest rate. The 1-day
repurchase rate and the overnight interbank rate
(quarterly average) increased to 2.79 and 2.67 percent
in this quarter, respectively.
The overnight swap rate that represents the cost
of borrowing in Thai baht using the U.S. dollar as
collateral also increased to 2.36 percent in line with theincrease in the policy interest rate.
At the end of 2011 Q2, the difference between the
Thai and the U.S. policy rates widened to 2.75
percent due to the total increase in the Thai policy rate
by 50 basis points during the second quarter.
Meanwhile, the Federal Open Market Committee (FOMC)
Short-term moneymarket rates rose in line
with the policy interest
rate.
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31Inflation Report July 2011
decided to maintain the federal funds rate at 0-0.25
percent in order to support the slow-than-expected
economic recovery.
Chart 3.1 Money market interest rates
Source: Bank of Thailand
Source: Bank of Thailand
Chart 3.2 LIBOR, Fed funds rate, and Thai repurchase rate
Overnight swap rate(onshore)
1-day repurchase rate
3-month T-bill rate
Overnight interbank rate(mode)
Jul 12
Jan
2008
Apr Jul Oct Jan
2009
Apr Apr AprJul Jul JulOct OctJan
2010
Jan
2011
Percent
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3.12
3.093.002.90
0
-1
-2
1
2
3
4
5Percent
Jan
2008
Apr Jul Oct Jan
2009
Apr Apr Apr Jul Jul JulOct OctJan
2010
Jan
2011
7-day LIBOR
1-day repurchase rate
Interest rate differential between
1-day repurchase rate and Fed funds rate
Jul 12
3.00
2.75
Fed funds rate
0.250.16
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32 Bank ofThailand
Bond market
Government bond yields for short- and medium-term maturity edged higher compared to the previous
quarter following the policy rate increase. In addition,
long-term government bond yields decreased due to
continued demand.
At the end of 2011 Q2, the short end of the
implied forward curve, which reflects market
expectations of the future policy rate, shifted up from
its level at the end of 2011 Q1. The expected short- and
medium-term interest rate (1 - 3 years ahead) increased
in line with the policy rate, reflecting marketexpectations that the policy rate would continue to rise
in the periods ahead, while inflationary pressure, as
reflected by expected interest rates over the next ten
years, started to decline.
Chart 3.3 Government bond yields
Source: Bank of Thailand
5
4
3
2
1
0
Percent
May 31, 2011
1 2 3 5 7 10 12 14
Apr 29, 2011
Jun 30, 2011
Maturity (years)3 months
Jul 12, 2011
Short-term governmentbond yields edged
higher due to policy rate
increases.
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33Inflation Report July 2011
Equity market
Risks of a global economic slowdown stemming
from sovereign debt problems in the euro area, fragilities
in the recovery process of the U.S and Japan, as well as
Thai political uncertainty weighed on foreign investors
,
sentiments and therefore resulted in a net sale of 43.6
billion baht during May - June 2011. Consequently, the
SET index fell to 1,041.48 points at the end of 2011 Q2
after previous rising to 1,093.56 points in April 2011.
Looking ahead, more concrete sovereign debt
resolution measures for European countries as well as
an improved domestic political climate following
general elections on 3 July 2011 will likely lift foreigninvestors, sentiments and attract the return of foreign
investment to the market. As such, the actual volatility
and the 3-month implied volatility of the SET index,
which reflects investors, concerns regarding volatility
in the financial market, have both remained low.
Source: Bank of Thailand
Chart 3.4 Government bond implied forward curves
5
4
3
2
Percent
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year (s) from now
May 31, 2011
Apr 29, 2011
Jun 30, 2011
Jul 12, 2011
The SET index dropped
in 2011 Q2 due to both
domestic and global
uncertainties.
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34 Bank ofThailand
Source: The Stock Exchange of Thailand
Chart 3.5 The Stock Exchange of Thailand (SET)
and net buy value of foreign investors
Source: Stock Exchange of Thailand and Bloomberg
Chart 3.6 Volatility of the Stock Exchange of Thailand (SET)
(up to July 12, 2011)
SET Index (RHS)
Net buy value of foreign investors
IndexBillion baht
Jan2010
Jan2011
Jan2009
Jan2008
Jul Jul Jul
0
100
200
300
500
400
600
700
800
900
1,000
1,200
1,10040
50
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
120
100
80
60
40
20
0
1,200
1,100
1,000
900
800
700
600
500
400
300
Percent (annualized) Index
Jan
2008
Jul Jan
2009
Jan
2010
Jan
2011
Jul Jul Jul
Actual volatility
Implied volatility of SET50(3 months)
SET Index (RHS)
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35Inflation Report July 2011
Banking system
At the end of 2011 Q2, the reference lending rates(MLR) and the 12-month time deposit rate of the four
largest commercial banks edged up to 6.87 and 2.35
percent respectively, in line with the policy rate increase.
The real MLR and the real 12-month time deposit
rate1/ of the four largest commercial banks at the end of
2011 Q2 rose from the previous quarter to 2.93
and -1.42 percent, respectively, due to the increase in
the lending and deposit rates that exceeded inflation
expectations.
1/ Minimum lending rate (MLR) and 12-month deposit rate adjusted by expected headlineinflation 12 months ahead with the use of compound interest formula.
Note: 1/Average rate of the 4 largest commercial banks end-period. When a range isposted by a commercial bank, the average of the minimum and maximum rates isused for calculation.
Source: Bank of Thailand
Chart 3.7 Policy rate and commercial banks,reference retail rates1/
0
1
2
3
4
5
6
7
8
Percent
Jun
6.87
Policy rate
12-month time deposit rate
6-month time deposit rate
3-month time deposit rate
3.00
MLR
Jan
2008
Apr Jul Oct Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul JulOct Oct
2.352.111.76
Retail interest ratesincreased in tandem
with the policy rate.
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36 Bank ofThailand
Deposits in Other Depository Corporations
(ODCs)2/ expanded by 14.4 and 12.9 percent in April
and May 2011, from the same period of last year. The
mobilization of deposits and bills of exchange served
to support credit demand that expanded with the
economy as well as manage the cost of funds amid
the upward interest rate cycle. In recent periods,
specialized financial institutions (SFIs) have become
more active in mobilizing deposits through lottery-linked
saving products that provide higher returns than
commercial bank deposit covered by the government,s
blanket deposit guarantee. As a result, deposits at SFIs
in April and May 2011 rose by 21.3 and 22.8 percent,
respectively.
Note: 1/Average rate of the 4 largest commercial banks 2/ Real interest rates are calculated from the compound interest rate formulaSource: Bank of Thailand
Chart 3.8 Commercial banks,interest rates1/
2/ODCs consist of domestically registered commercial banks, branches of foreign banks, inter-national banking facilities, finance companies, Specialized Financial Institutions (includingGovernment Savings Bank, Government Housing Bank, Bank for Agriculture and AgriculturalCooperatives, Export-Import Bank of Thailand, Small and Medium Enterprise DevelopmentBank of Thailand, and Islamic Bank of Thailand), saving cooperatives, and money marketmutual funds.
8
6
4
2
0
-2
-4
10
Real MLR2/
12-month time deposit rate
MLR
2.932.35
-1.42
Jun
6.87
2/Real 12-month time deposit rate
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Apr Jul Jul JulOct Oct Oct
Percent
Deposits of ODCs
continued to grow.
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37Inflation Report July 2011
Private credits extended by ODCs continued
to grow by 15.3 and 15.6 percent in April and May
2011, respectively, from the same period of last year.
This credit expansion was driven mainly by economic
growth and the resulting need for working capital
loans3/. Meanwhile, loans extended to the household
sector remained elevated.
Chart 3.9 Other Depository Corporations,deposits
and private credits
Source: Bank of Thailand
Chart 3.10 Other Depository Corporations,
private credits
by types of debtors
Source: Bank of Thailand
12
18
16
14
10
8
6
4
2
0
-2
Annual percentage change
Deposits and bills of exchange
Private credits
Deposits
15.6
8.4
12.9
May
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Apr Jul Jul JulOct Oct Oct
16
14
12
10
8
6
4
2
0
-2
-4
-6
Annual percentage changeMay
15.6Credits to the household sector
Credits to the business sector
Other Depository Corporations,private credits
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Apr Jul Jul JulOct Oct Oct
3/ Credit data from Commercial Banking System
Private credits still
expanded mainly due
to household andbusiness loans.
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38 Bank ofThailand
Private credit extended by commercial banks in
April and May 2011 grew by 12.3 and 13.6 percent,
respectively, over the same period of last year.
Outstanding loans in the real estate sector started to
edge up but remained below its pre-Lehman crisis level.
Mortgage loans continued to expand albeit at a lower
rate. Furthermore, loans extended to the auto leasing
sector continued to grow despite some impact from the
supply shortage during the quarter.
Chart 3.11 Corporate loans extended by commercial banks
Source: Bank of Thailand
Chart 3.12 Consumer loans extended by commercial banks
Source: Bank of Thailand
120
110
100
90
80
70
Index (December 2008)
May 2011Corporate
Construction
Finance
Commerce
Real estate
Production
Total corporate loans
Dec2008
Mar2009
Mar2010
Mar2011
Jun JunSep SepDec Dec
160
150
100
110
120
130
140
90
Index (December 2008)
May 2011
Consumer loans
Private consumption
Mortgage
Auto leasing
Credit cards
Total consumer loans
Dec2008
Mar2009
Mar2010
Mar2011
Jun JunSep SepDec Dec
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39Inflation Report July 2011
According to the Senior Loan Officer Survey
conducted end-June 2011, private credit demand for both
household and corporate sectors in the third quarter
continued to increase from the previous quarter in line
with economic expansion.
Chart 3.13 Expected demand for corporate and consumer loans
in 2011 Q3
Source: Senior Loan Officer Survey conducted at the end of June 2011
Monetary base and money supply
In April and May 2011, the monetary base
expanded by 9.3 and 9.6 percent, respectively, over the
same period last year. This development was due to
robust demand for cash as a result of the expanding
economy.
Broad money also grew at a rate of 15.1 and 14.2percent in April and May, respectively, over the same
period last year. The expansion was a result of deposit
mobilization by financial institutions, especially SFIs.
0
50
-50
100
-100
0
50
-50
100
-100
0
50
-50
100
-100
0
50
-50
100
-100
OverallSMEs
Expected demand forcorporate loansin the next 3 months
Expected credit standard forcorporate loansin the next 3 months
Expected credit standard forconsumer loansin the next 3 months
Expected demand forconsumer loansin the next 3 months
+ Increased + Increased
- Tightened
- Decreased - Decreased
2010 Q4
2011 Q2 2011 Q3
2011 Q1 2010 Q4
2011 Q2 2011 Q3
2011 Q1
H ous ing Cre di t ca rd Ot he r
H ous ing Cre di t ca rd Ot he r
+ Eased
- Tightened
+ Eased
Large corporate
OverallSMEsLarge corporate
Demand for loans by
both households and
firms grew fromthe previous quarter in
line with economic
expansion.
The monetary base
expanded in line with
robust demand for
cash, while broad
money picked up as
a result of deposit
mobilization.
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40 Bank ofThailand
Exchange rates
The Thai currency averaged at 30.29 baht per
U.S. dollar in 2011 Q2, appreciating by 0.8 percent from
the previous quarter. Factors underpinning the baht
appreciation in the first month of the quarter included:
(1) strong economic fundamentals; (2) expectations that
the Bank of Thailand would continue to raise the policy
Chart 3.14 Growth rate of money supply
Source: Bank of Thailand
Source: Bank of Thailand
Chart 3.15 Contribution to broad money growth
Annual percentage change
15
20
10
5
Jan2007
Jan2008
Jan2009
Jan2010
Jan2011
Jan2007
Jan2008
Jan2009
Jan2010
Jan2011
May
May
Currency in circulation
Broad money
Narrow money
Monetary base
9.69.2
10.7
14.2
0
-5
Annual percentage change
15
20
10
5
0
-5
16
14
12
108
6
4
2
0
-2
-4
Securities other than sharesMoney market mutual fundsOther deposits at cooperativesOther deposits at specialized banksDeposits at finance companiesOther deposits at commercial banksDemand deposits at Other Depository CorporationsCurrency in circulation
Broad money growth
May
14.2
Annual percentage change
Jan
2008
Apr Jul Oct Jan
2009
Apr Jul Oct OctJan
2010
Jan
2011
Apr Apr Jul
On average, the Thai
baht appreciated
against the U.S. dollar
in 2011 Q2 due to
strengthening in April
despite depreciation
over the May-June
period.
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41Inflation Report July 2011
rate so as to ease inflation pressures; and (3) expectations
that the FOMC would maintain an expansionary
monetary policy in order to sustain the economic
recovery. As a result, more foreign capital flowed into
the Thai stock and bond markets.
Source: 1/ Bank of Thailand2/
Bloomberg
Chart 3.16 Exchange rate and trade-weighted dollar index
37 88
86
84
82
80
78
30.74
69.36
76
74
72
70
68
66
36
35
34
33
32
31
29
30
Baht/U.S. dollar
Baht/USD1/
Index
30 Jun
Dollar index2/
Jan
2008
Apr Jul Oct Jan
2009
Jan
2010
Jan
2011
Apr Apr Apr Jul JulOct Oct
During the last two months of the quarter, the baht
resumed a depreciating trend against the U.S. dollar.
This was attributable to increasing risks in the global
financial market due to the sovereign debt problem in
Greece and uncertainty over the United States, economic
recovery. Moreover, foreign investors adopted a wait-
and-see attitude pending Thailand,s election results.
Consequently, capital outflows from the stock market
were particularly high during the period.
Regional currencies strengthened against the U.S.
dollar from the previous quarter. The appreciation was
primarily due to inflows of capital into both the stock
and bond markets, as markets became more confident
Both major and
regional currencies
appreciated against the
U.S. dollar.
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42 Bank ofThailand
Source: Reuters
Chart 3.17 Change in the values of foreign currencies againstthe U.S. dollar in 2011 Q2
(compared with the previous quarter,s average)
in economic fundamentals and expected regional
central banks to further hike policy rates to curb
inflation pressures. Nevertheless, the appreciation trend
of many regional currencies slowed during the end of
the quarter, after foreign investors decreased their
holding of risky assets from concerns over the
sovereign debt problem in Greece and uncertain global
economic recovery, as reflected in the economic data
of many countries including China, the United States
and the euro area, which came in below expectations.
0.8
0.9
1.0
1.2
1.2
1.6
1.7
2.93.3
3.6
5.0
5.9
0 1 2 3 4 5 6 7Percent
Philippines
China
UK
Australia
Singapore
Indonesia
South Korea
Thailand
apan
Taiwan
Malaysia
Euro
Meanwhile, major currencies such as the yen, the
pound sterling and the euro appreciated, on average,
against the U.S. dollars. In the beginning of the quarter,the euro appreciated primarily due a policy rate increase
by the ECB while the FOMC maintained the same policy
rate. This widened the interest rate differential,
encouraged markets to invest in the currency, and led
to a devaluation of the yen and increased yen carry
trade. However, growing concerns over the problem of
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43Inflation Report July 2011
sovereign debt in Greece in the last two months of the
quarter partially contributed to a slowing of the euro,s
strengthening whereas the yen appreciated, on
average, in the quarter.
Source: Bank of Thailand
Chart 3.18 Nominal effective exchange rate of the Thai baht (NEER)
(Trade-weighted, 2007 = 100)
110
100
105
95
90
85
Index
May
(102.49)
Jun
(100.63)
REER
NEER
Jan
2006
Jul Jan
2007
Jul Jan
2008
Jul Jan
2009
Jul JulJan
2010
Jan
2011
Overall, the baht appreciated slightly against the
U.S. dollar while most major and regional currencies
strengthened substantially. Consequently, the Nominal
Effective Exchange Rate (NEER)4/ depreciated by 1.09
percent from the previous quarter. In addition, the Real
Effective Exchange Rate (REER)5/ appreciated by 0.68
percent over the April-May period from the previous
quarter,s average level primarily due to an increase in
the prices of Thai products relative to those of trading
partner countries in April. Nonetheless, the average REER
in 2011 Q2 may weaken in line with the average NEER.
4/ The Thai baht NEER is calculated as a weighted average of bilateral exchange rate betweenthe baht and major trading partners currencies (trade-weighted, 2007 = 100)
5/ The real effective exchange rate (REER) is calculated by deflating the NEER using relativeinflation rates to reflect the countrys price competitiveness.
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44 Bank ofThailand
Source: Bank of Thailand
Chart 3.19 Baht actual volatility
(up to June 30, 2011)
The average volatility of the baht in 2011 Q2
declined from the previous quarter. The baht was
relatively stable early in the quarter, but moved more
rapidly in May and June. Accordingly, the average
volatility in 2011 Q2 declined from the previous
quarter.
Percent (annualized)
8
6
4
2
0
4.93
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jul Jul JulOct Oct OctApr Apr Apr Apr
The average volatility of
the baht decreased from
the previous quarter.
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45Inflation Report July 2011
4. Financial Stability Conditions and Outlook
Thailand,s solid fundamentals continued to support
domestic growth, undeterred by the weakened growth
prospects of major industrial economies that remained
plagued by structural concerns. Households and
corporates, financial well-being and strong income
prospects favored financial institutions, and would serve
as the funding source for domestic demand expansion
over the period ahead, particularly investment growth.
Going forward, the MPC considers the following
as major risk factors to Thailand,s economic stability.
(1) The global economy may suffer a slowdown mainly
due to sovereign debt concerns in Europe, the fragility
of economic recovery in the U.S. and Japan, as well as
high volatility due to sudden capital movements across
countries. These factors, altogether, may adverselyaffect households, income and firms, profitability. (2)
Pressures from rising production costs and inflation may
heighten with soaring oil and commodity prices. In
addition, (3) the government,s stimulus package may
have some impacts on households, consumption and
debt accumulation, possibly threatening Thailand,s
long-term fiscal position as well.
Non-financial corporate sector
Overall corporate stability improved with the
recovery of domestic and international economies.
Profitability and debt-servicing ability of businesses
were strong, as reflected in the improved performance
of non-financial companies listed on the Stock Exchange
of Thailand in 2011 Q1 in all industries except the real
Corporate sector,s
financial conditions
continued to improve
in 2011 Q1, but with
higher risks going
forward.
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46 Bank ofThailand
estate sector. Particularly, the real estate slowdown was
attributable to a decline in demand for housing after a
large number of houses sold last year. Moreover,
accelerated inflation since the beginning of 2011 and
rising interest rates also added to consumer concerns,
prompting households to delay their new home
purchases.
Chart 4.1 Operating profit margin classified by industry*
Chart 4.2 Indicators for the corporate sector*
Note: * Each bar depicts an interquartile range, where the upper and lower bounds representthe 25th and 75th percentiles, respectively. The symbol + indicates the median.
**Average over the 2003 Q1 - 2007 Q4 periodSource: Stock Exchange of Thailand, calculations by Bank of Thailand
10
20
30
40
10
15
2007 20072008 20082009 20092010 2010 2011
2007 20072008 20082009 20092010
2011
2011 2010 2011
5
0
0
-5
-10
-10
-15
10
15
5
0
-5
-10
-15
-20
20
30
40
10
0
-10
-20
Production sector
Hotel and restaurant sector
Percent Percent
Percent Percent
Construction sector
Real estate sector
Average** = 5.3 Average** = 2.4
Average** = 18.8 Average** = 13.0
2008 20082009 20092010 2011 2010 2011
2008 20082009 20092010 2011 2010 2011
Operating profit marginPercent
Debt-to-equity ratio
Interest coverage ratio Current ratio
0
0
5
5
-5
-5
-10
10
10
20 2.0
3.0
2.5
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
15
15
Average** = 6.4 Average** = 0.8
Average** = 1.5Average** = 3.4
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47Inflation Report July 2011
Despite their strong performance, businesses still
need to cope with risks from both domestic and
external fronts. Domestic risks include production costs
that will rise inevitably given the lifting of LPG price for
industries starting from July 2011 - with the glass,
mirror, and ceramic industries most severely affected.
Furthermore, the new government,s policy on minimum
wage raise may also drive production costs up
markedly, with labor costs currently accounting for 13
percent of businesses, average total costs.
Chart 4.3 Wage distribution and ratio of labor cost to total cost
Note: * Private employees onlySource: National Statistical Office.
Source: National Statistical Office andcalculations by Bank of Thailand.
Kernel density function
Baht/day
Recent minimum wage = 176 baht/day
0.0025
0.0020
0.0015
0.0010
0.0005
0
0 200 400 600 800 1000
Average 437
13.3
10.5
7.1
0 5 10 15 20
8.9
8.2
Non-bank
Minimum wage cost per total cost
Other costs per total cost
Manufacturing
Construction
Real estate
Hotel andrestaurant
Baht/day
384
367
Median
Mode
Wage distribution* The ratio of labor cost to total cost
On the other hand, major external risks are f