Thai inflation rose in October as flooding pushed up the price of certain foodstuffs and other goods but the increase was smaller than expected and most economists still expect the central bank to leave interest rates on hold for now.

Headline inflation was 4.19 percent versus 4.03 percent in September. But even if it had been as high as 4.6 percent as some economists had forecast, tighter monetary policy has been ruled out by the economic devastation caused by the floods.

The central bank has said it could hold an emergency meeting on interest rates because of the flooding and some economists say the odds on a policy rate cut have increased, but most still expect it to be held at 3.50 percent this year.

Core inflation, which excludes fresh food and energy and which the central bank aims to hold in a range of 0.5 to 3.0 percent, was practically unchanged in October at 2.89 percent.

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COMMENTS:

GEORGE WORTHINGTON, CHIEF ECONOMIST, ASIA-PACIFIC, IFR MARKETS, SYDNEY

The smaller-than-expected rise in inflation gives the Bank of Thailand a bit more freedom to manoeuvre, specifically to cut rates if it feels the impact of the floods warrants some monetary support.

Having lifted rates nine times in the current cycle, the BOT can afford to reverse one or even two if necessary to underpin confidence and activity without putting its inflation target at risk. Provided, that is, that it moves back to a more neutral stance as the economy gets back on track.

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RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

On policy, distorted Q4 inflation numbers are unlikely to have much influence on the BOT's rate deliberations at the late-November meeting, with an on-hold decision on the cards.

The focus, however, will be on the evolving flood situation, with another deluge and renewed risks to growth expected to prod the BOT to shift towards an accommodative rate bias, though only next year.

We also note that the BOT has signalled an upcoming shift to its inflation-targeting regime into next year and with headline CPI expected to remain firm into Q4 and possibly thereafter, the odds of a rate cut are low, in our view.

With an eye on rhetoric, we expect rates to be held unchanged into end-year with a token rate cut likely in H1 next year when the impact on production and exports becomes more evident.

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THANOMSRI FONGARUNRUNG, ECONOMIST, PHATRA SECURITIES

The inflation figure was better than expected. The number reflected softer-than-expected increases in prices of food. Overall, inflation remained a threat and should not alter the view of the Bank of Thailand on interest rates.

We think the Bank of Thailand will maintain its policy rate for a while. Our forecast is for the rate to be maintained at 3.5 percent later this month. The policy rate may hold at this level through the course of next year, given the pressures on inflation coming from wage rises and the resumption of the oil fund levy.

The impact of flooding may be temporary, mainly hurting growth in the fourth quarter. The economic situation should start to improve in the first quarter and return to normal, probably from late in the second quarter. The risk to our interest rate view will come from weaker-than-expected domestic demand, if this is the case.

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PIMONWAN MAHUJCHARIYAWONG, ECONOMIST, KASIKORN RESEARCH Centre

As expected, the flooding has pushed up food and food-related prices. Going forward, we expect food and agricultural prices to continue to stay at a high level for the remaining two months of this year and perhaps going into early 2012 before improving later in the year.

Inflation will stay high in coming months. We expect inflation of 3.9 percent this year and in 2012.

Our Kasikornbank group view on interest rates is still the same -- we expect the rate to be held until the end of this year. It's still hard to forecast a cut at this point: we'll have to see the direction of inflation and any economic improvement in the coming period.

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MARKET REACTION:

- The baht was at 30.79/83 per dollar after the data came out, versus 30.79/81 in early morning trade.

- The benchmark stock market index was down just 0.01 percent at 0420 GMT after the data; it had also been flat just before.

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LINKS:

For details, see Commerce Ministry website: http://www.indexpr.moc.go.th/price_present/cpi/stat/test/select_cpig_region.html?tab

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BACKGROUND

- The Bank of Thailand kept its benchmark rate, the one-day repurchase rate, steady at 3.50 percent on October 19, pausing after a year of tightening because of the deteriorating international economy as well as the flooding at home. Its next scheduled meeting is on November 30.

- It has said it could call a special meeting before then if necessary but it has also said that a rise in prices as a result of severe flooding will be temporary.

- Economists generally expect the central bank to hold the policy rate until the end of next year. Some say the odds on a cut in the near term have increased.

- The central bank slashed its 2011 economic growth forecast to just 2.6 percent from 4.1 percent last week; it said it might review that forecast again in November as the impact of the worst floods in half a century is far from over.

- But it has said the new government's economic policies and spending on reconstruction after the flooding could add to inflationary pressures. It predicted price rises of 3.5 percent in 2012 versus 3.8 percent this year, with core inflation at 2.5 percent after an expected 2.4 percent this year.

- The central bank aims to keep core inflation -- which excludes energy and fresh food prices -- in a range of 0.5-3.0 percent, which guides monetary policy. But it plans to switch to targeting headline inflation next year.

(Reporting by Bangkok Newsroom; Editing by Alan Raybould)