Thai Inflation Slows Amid Lower Fuel Costs, Spending

By Suttinee Yuvejwattana

Sept. 1 (Bloomberg) -- Thailand's inflation slowed from the fastest pace in a decade in August as antigovernment protests hurt spending and oil prices fell, making it likely the central bank will refrain from further interest rate increases.

Consumer prices gained 6.4 percent from a year earlier, the Commerce Ministry said today in Bangkok. That compares with the 8.8 percent median estimate of 11 economists in a Bloomberg News survey. The pace was 9.2 percent in July.

Political instability has overtaken inflation as the biggest threat to Thailand's economic growth, which will slow further this year, the central bank said last week. Prime Minister Samak Sundaravej yesterday rejected calling an early election amid protests that threaten to paralyze the government.

``Rates are likely to be left on hold into 2009 and attention will gradually turn to supporting growth,'' Alvin Pontoh, an economist at Capital Economics in London, wrote in an Aug. 27 note to clients. ``The Bank of Thailand has probably done enough to keep inflation in check.''

Thailand's central bank raised its benchmark interest rate to 3.75 percent last week in a second increase in as many months to cool price increases fanned by the cost of global oil, which has risen 22 percent this year. The nation's economic growth slowed for the first time in more than a year in the second quarter as domestic spending declined amid higher costs and antigovernment protests, which began May 25.

Slowing Demand

Core inflation, which excludes fresh food and fuel prices, slowed to 2.7 percent in August, the Commerce Ministry said today. The economists surveyed by Bloomberg predicted a 3.9 percent rise.

Inflation pressure in the Southeast Asian nation has abated, allowing the Bank of Thailand to `anchor inflation expectations,'' Amara Sriphayak, a central bank official, said in Bangkok today after the release of the consumer price index figures. ``Core inflation is lower than we expected. The risk from oil prices has also eased.''

The central bank and finance ministry agree Thailand's economic growth may ease in the second half of this year as a global slowdown reduces demand for the nation's exports, which account for 70 percent of the economy.

Political instability may also erode consumer spending and investments, the government's economic adviser said Aug. 25. Growth in the $206 billion economy slowed to 5.3 percent in the second quarter from 6.1 percent in the previous three months.

Continuing Protests

Protesters have occupied Samak's government house compound in Bangkok since Aug. 26, claiming his administration is illegitimate because it serves the interests of former premier Thaksin Shinawatra, ousted in a 2006 coup. Leaders of the People's Alliance for Democracy say they will continue protests until Samak quits by forcing airport closures and encouraging rail, power and airline strikes.

The Finance Ministry last week said inflation peaked in July, when the government cut fuel taxes, gave free electricity and water to low-use households, and waived fares for cheap bus and train seats in a six-month program costing 46 billion baht ($1.3 billion) to ease inflationary pressures.

``The cosmetic improvement in today's inflation numbers, which is likely to last as long as the subsidies remain in place, considerably eases pressure on the Bank of Thailand to hike rates further, especially considering mounting political uncertainties,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong.

The tax cuts contributed to a 13 percent drop last month in the domestic price of diesel, used for transport and manufacturing. Thailand imports almost all of its crude oil, the price of which fell 7 percent in August.

To contact the reporter on this story: Suttinee Yuvejwattana in Bangkok at Suttinee1@bloomberg.net