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Rate cut plan sees Thai inflation diving to 10-month low

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November 4, 2008

Rate cut plan sees Thai inflation diving to 10-month low
Thailand's inflation rate fell for the third month in October to a 10-month low of 3.9 percent, underscoring expectations the central bank will cut interest rates next month to shield the economy from a global downturn, reported Reuters.

The drop was much bigger than expected.

The dive in inflation means the Bank of Thailand could cut rates at its next policy review on Dec. 3, economists said.

"The continued deceleration in inflation should provide justification for the BoT to be ready for the cut in rates it needs to support growth," said economist Usara Wilaipich of Standard Chartered Bank.

The central bank raised its benchmark rate by 25 basis points in both July and August, taking it to 3.75 percent in response to a surge in inflation earlier this year.

Economist Charl Kengchon of Kasikorn Research Center attributed the low October inflation rate to steep falls in the price of crude oil. "Average Brent oil in October fell to $69 a barrel from $97 in September."

"November headline inflation on a month-on-month basis will be negative, while we'll see oil prices starting to become more stable. The annual headline figure will be lower than 3.9 percent, possibly at 3.2 or 3.3 percent," he added.

BoT Deputy Governor Atchana Waiquamdee fuelled the rate cut speculation on Friday, telling reporters that inflation was "not a risk" now that oil prices had come down and the economy had slowed.

Annual core inflation was 2.4 percent in October, matching the market consensus and down from 2.6 percent in September.

In the past three months, core inflation has fallen well below the central bank's target ceiling of 3.5 percent, which had been breached in June and July.

Annual headline inflation, which averaged 6.3 percent in January to October, had shot up from an average of just 2.3 percent in 2007 because of steep oil and food price rises.

To hold down living costs and shore up its popularity, the government of Samak Sundaravej -- who stepped down as prime minister in September -- cut the consumption tax on petrol sharply from late July.

On Monday, a Commerce Ministry official cut his inflation forecast for this year to a range of 5.9 to 6.3 percent from the 6.5 percent to 6.9 percent expected earlier.

In mid-October the central bank said it expected inflation to average 6.0 to 6.5 percent this year rather than the 7.5-8.8 percent it had forecast in July.

The Thai economy grew 4.8 percent in 2007 and the central bank expects it to expand between 4.3 percent and 5.0 percent in 2008. Analysts say a slowdown in export demand from major markets in the last quarter will weigh on economic growth.

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