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Highest Thai Inflation Since November 2011 Means Rates on Hold

Night market in Soi Texas, Chinatown, Thailand.
Greg Elms | Lonely Planet Images | Getty Images
Night market in Soi Texas, Chinatown, Thailand.

Thailand's annual inflation rate jumped to 3.63 percent in December, up almost one percentage point from November, but core inflation is comfortably within the central bank's target range, putting it under no pressure to raise interest rates.

Most economists expect the Bank of Thailand (BOT) to keep its policy rate unchanged at 2.75 percent at its next monetary policy meeting on Jan. 9.

December's inflation rate -- the highest since November 2011 -- still leaves it with ample room to keep interest rates low but has reduced the chance of any further cuts to help Thailand deal with the bad global economy.

(Read More: Surging Thai Bank Shares to Jump a Further 30%: Nomura)

"While we do not expect inflation to spin excessively out of control, it is likely to stay sufficiently high that it prevents the Monetary Policy Committee (MPC) from delivering additional policy rate cuts," said Santitarn Sathirathai, an economist with Credit Suisse.

"This is part of the reason why we expect the central bank to keep the overnight rate on hold at 2.75 percent for the rest of this year," he said.

Core inflation, which stripped out a big rise in food and drink prices, edged down slightly to 1.78 percent in December from 1.85 percent in November. It remains well within the BOT's target range of 0.5-3.0 percent, which guides policy.

Economists polled by Reuters had expected the annual headline inflation rate to pick up to 3.23 percent in December, with core inflation down slightly to 1.80 percent.

The rise in the headline rate resulted from a sharp increase in food and beverage prices of 4.00 percent from a year before, more than double November's 1.92 percent, which contributed to the surprisingly low headline rate that month.

Vegetable prices in December spiked 22 percent from November due to poor weather that cut supplies.

Benign Price Pressures

"Overall, December's price pressures remained benign, given core inflation at only 1.78 percent year on year, while higher headline inflation at 3.6 percent was due partly to the low-base effect of the previous year," said Usara Wilaipich, a senior economist at Standard Chartered Bank.

These factors will give the BOT an opportunity to adopt a "wait-and-see" stance in the first quarter of 2013, she said.

A nationwide daily minimum wage of 300 baht ($9.80) began rolling out on Tuesday. Wages will jump 35 percent in some regions, on top of a nationwide increase of 40 percent last April.

However, the BOT has said it is not concerned about inflation pressures at this point as the global economy is sluggish and oil prices should not go too high.

It had forecast headline inflation of 3.0 percent for 2012, falling to 2.8 percent for in 2013, with core inflation seen at 2.1 percent for 2012 and 1.7 percent for 2013.

The Commerce Ministry, which compiles the inflation figures, on Wednesday put inflation for the whole of 2012 at 3.02 percent, with core inflation at 2.09 percent.

"Headline inflation for 2012 was within expectations as global crude prices were not too high while government price controls and subsidies continued to keep consumer prices in check," it said in a statement.

"For December, inflation month-on-month was driven by higher food and retail fuel prices. The annual rate increase was mainly due to higher food prices," the statement added.

The ministry said it planned to rebase the index to 2011 from 2007.

The BOT recently raised its forecast for economic growth and now predicts 4.7 percent for 2013 after 5.8 percent for 2012.

Contact Asia Economy

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