Thailand's core inflation drops to two-year low in December

Blame it on weak domestic demand.

Thailand's core inflation came in at -0.7% (YoY) in December, marking the lowest reading in two years.

According to DBS, 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. The weak inflation reading 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. We expect private consumption growth 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," said the report.

:Households are continuing to deleverage, which is also evident in how growth in household debt has eased throughout 2015. Note that we project household debt-GDP ratio to have eased to about 82% in 2015, compared to 84.5% in 2014. 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," DBS added.

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