The Bank of Thailand has made a surprise move by cutting its key interest rate for the first time in four years, a step long urged by the government to revive a struggling economy with inflation falling below target.
The central bank’s Monetary Policy Committee voted 5 to 2 to reduce the one-day repurchase rate by 25 basis points to 2.25%. The rate had been held at a 10-year high of 2.50% since September 2023.
Of the 28 economists polled by Reuters, only four had predicted a quarter-point cut this week. Twenty-four respondents had expected no change.
The most recent adjustment to the policy rate was a 25-basis-point increase in September of last year. The last time rates were cut was in May 2020.
The year’s final policy meeting is scheduled for December 18.
The Pheu Thai government has been urging the central bank to reduce borrowing costs to help boost Thailand’s underperforming economy. They’ve also pointed out that inflation has remained below the central bank’s 1-3% target range for several months.
In August, consumer prices rose by 0.35% year-on-year, bringing the average inflation for the first eight months to 0.15%, reflecting a contraction in the first quarter.
Following the meeting, the MPC said in a statement that it expects inflation to gradually return to the target range by the end of 2024.
“The committee believes that a neutral policy rate stance remains appropriate given the economic growth and inflation outlook,” it said.
On October 9, Thai Chamber of Commerce chairman Sanan Angubolkul stated that lower borrowing costs would help businesses grappling with high expenses and a strong baht.
The Thai baht surged 14% in the third quarter, making Thai exports more expensive compared to those of competitors. The currency has since weakened slightly in recent days.
Central bank governor Sethaput Suthiwartnarueput emphasized that rate decisions will continue to be guided by domestic economic, financial, and inflation conditions.
He also noted that lower interest rates would likely have little effect on stimulating the economy, which, in his view, requires major structural reforms.
In addition, the high level of household debt, which stands at 91% of gross domestic product, has often been cited as a reason to maintain tight monetary policy.
The central bank slightly raised its 2024 economic growth forecast to 2.7% from the previous estimate of 2.6%, while trimming its 2025 forecast to 2.9% from 3.0%.
The World Bank predicts that the economy will grow by 2.4% this year and 3.0% next year.
Growth drivers include tourism, private consumption supported by government stimulus measures, and improved exports due to higher demand for electronics.
“However, the recovery has been uneven across sectors, with some merchandise exports, manufacturing production, and SMEs under pressure from structural issues,” the MPC said in its statement.
The statement also highlighted a decline in business loan growth, particularly for SMEs, along with a drop in hire-purchase and credit-card loans.
“Credit quality has deteriorated, partly due to debtors who previously received financial assistance, as well as SMEs and vulnerable households experiencing slower income recovery and elevated debt burdens,” it said.
While the interest rate cut may ease some of the criticism aimed at the Bank of Thailand, concerns remain over the political maneuvering involved in selecting a new central bank chairman.
The government favors Kittiratt Na-Ranong, a former commerce minister and critic of the central bank’s hawkish monetary policy, for the position.
Kittiratt is also a loyalist to the Shinawatra family. Concerns over political interference recently prompted the central bank’s selection committee to delay its decision.