Despite inflation dropping to an 11-month low, the Bank of Thailand (BOT) said on Thursday that the current situation cannot be defined as “deflation.”
BOT’s Senior Director of Economic and Policy Department Don Nakornthab said the central bank’s definition of deflation is based on the European Central Bank (ECB)’s four-point criteria.
“Based on our monetary policy practices, the current situation cannot be defined as deflation,” he said. “However, the economy is still at risk of entering a deflation period if it contracts any more or recovers slower than the BOT expected.”
The central bank is expecting a recession of at least 5.3 per cent in 2020.
Don said that Thailand’s inflation has only been in the negative for three months and that is not a “prolonged period” of time.
At the same time, the BOT already predicts that inflation will be in the negative in 2020 before it returns in 2021.
Don said the current negative headline inflation of 3.44 per cent in May, the lowest in ten years and ten months since July 2009, was mainly caused by the drop in oil prices.
The Ministry of Commerce also said on Thursday that the average inflation rate has already dropped by 1.04 per cent during the first five months of 2020 (January to May).
“The [MOC] prediction for the average inflation rate in the next five years was at 1.8 per cent and this is also in line with the BOT’s target of 1-3 per cent per year,” he added.
MPC
The BOT’s Monetary Policy Committee (MPC) said during its meeting on May 20 that headline inflation would only temporarily fall into the negative.
This is mainly due to energy prices, government measures to lower electricity bills, as well as the lowered price of fresh food to meet with demand during the outbreak containment.
However, the prices of goods in the other categories still expanded.
Core inflation remains subdued at low levels because of weakened domestic demand and government measures to reduce the costs of living.
Still, the medium-term inflation expectations remained within their target, “suggesting the absence of deflation risks,” as stated by the meeting’s minutes.
ECB
According to ECB, sustained negative rates of inflation are concerning if they create negative feedback loops within the real economy.
For example, prolonged deflation can increase the burden of debt servicing. The reaction of banks, households and firms could potentially create additional negative feedback loops between the real economy and the price level.
The ECB’s four-point criteria which distinguishes outright deflation from subdued price developments of a less malign nature include:
- A negative annual rate of consumer price inflation over a prolonged period
- A negative rate of change in the prices of broad-set items in goods and services
- Longer-term inflation expectations becoming unanchored and falling clearly below levels consistent with the central bank’s definition of price stability
- Persistently very low or negative GDP growth rates and/or high and rising unemployment rates
[Photo Courtesy of Bank of Thailand]
