• 
• 

It now appears likely that inflation may soon exceed 10 per cent, although as most pundits point out, average inflation for the entire year should still be single digit.

Core CPI, which takes away "volatile" items like petrol and food, also rose over the same period, from 0.7 per cent to 3.6 per cent. This has two implications. First, price increases in oil and other commodities are having a wider effect on overall price levels.

And the fact that core CPI is now above the central bank's target upper limit of 3.5 per cent means the Bank of Thailand (BOT) will have to tighten monetary policy.

The key question investors are asking is: how much will the BOT raise its policy rate?

Yield curves are already pricing in significant increases. Investors are expecting the six-month swap rate, which is now about 4 per cent, will increase to 5.6 per cent in 12 months from now and 6.3 per cent in two years. This does not necessarily imply that the central bank's policy rate will move exactly in parallel - the gap between the policy rate and the swap rate tends to increase during periods of rising interest rates.

It is also possible investors are plain wrong - in which case, the present one- and two-year rates may be highly elevated.

In any case, the yields indicate expectations of a 1 to 1.5-per-cent increase in the policy rate over the next year.

The BOT has indeed been strongly signalling it is worried about inflation and that interest rates will be moving upwards.

The key event to monitor is therefore the upcoming monetary-policy meeting on July 16. Then we will receive the first indication of whether market pricing is appropriate.