On September 27, the Bank of Thailand (BoT) raised its benchmark policy rates by 25 basis points (bps) to 2.50%, pushing borrowing costs to their highest since 2013.
- The Bank of Thailand (BoT) raised its policy rate by 25 bps to 2.50% in September 2023, the highest since 2013, as a pre-emptive measure against inflationary pressures from government spending.
- The BoT is expected to keep the rate unchanged at 2.50% for the rest of 2023 and most of 2024, as inflation remains subdued and growth is lacklustre.
- The BoT may start cutting rates in H2 2024, following the US Federal Reserve, but the risks are skewed towards a longer hold if there are supply shocks that push up inflation.
The hike came as a surprise to many analysts, including us, particularly because inflation in Thailand is currently very low. We believe the primary motivation seems to be a pre-emptive measure against the likely inflationary impact of the new government’s expansionary spending.
The BMI perspective is in line with the accompanying press statement from the BoT, where they expressed concern about the potential inflationary pressures that may arise from government economic policies. However, we believe that the recent interest rate hike in September marks the end of the current tightening cycle.
Rate cuts may occur in second half of 2024
BMI anticipates that rate cuts will be implemented in the second half of 2024. The eventual stabilization of global monetary conditions will lead to policy rates being maintained in the first half of 2024. Considering our outlook for the US Federal Reserve to initiate monetary loosening in the second half of 2024, it is likely that the Bank of Thailand will follow suit.
However, any premature action by the Bank of Thailand could potentially worsen the weakness in the baht, which has already depreciated by approximately 5.0% year-to-date.