Bank of Thailand delivers first rate cut in over 4 years

The Bank of Thailand has cut its interest rate for the first time in four years, lowering it to 2.25% from a 10-year high of 2.50%. This move aims to stimulate the sluggish economy and address inflation that has been below the target range.

Key takeaways

• The Bank of Thailand has reduced its key interest rate for the first time in four years, lowering it to 2.25% from a 10-year high of 2.50%.
• The Pheu Thai government has been pressuring the central bank to reduce borrowing costs and stimulate the economy, which has been underperforming and experiencing inflation below the target.
• The central bank expects economic growth of 2.7% for 2024, driven by tourism, private consumption supported by government stimulus measures, and improved exports, although the recovery has been uneven across sectors.

The rate cut comes as a response to the government’s persistent lobbying for measures to stimulate the economy, which has been experiencing sluggish growth with inflation remaining below the target range. The Monetary Policy Committee’s vote was influenced by several factors, including the need to ease debt burdens and support economic expansion without exacerbating household debt ratios.

The purpose of the measure is to revitalize a sluggish economy with inflation below the target. The central bank’s Monetary Policy Committee proceeded with a vote of 5 to 2 to reduce the one-day repurchase rate by 25 basis points, bringing it to 2.25%.

This move by the central bank, which is the first rate adjustment in over four years, seems to have been well-received by the market, indicating that investors are optimistic about the potential for economic growth and increased liquidity in the market. The rate cut is likely to benefit exporters and tourism-related firms by easing the pressure of a stronger baht, which can make Thai goods and services more competitive internationally.

Since September 2023, the rate has been at a 10-year high of 2.50%. The most significant change in the policy rate had been an increase of 25 basis points in September 2023.

The last time the institution proceeded with a rate cut was May 2020. In recent months, the Pheu Thai government has been pressuring the central bank to lower borrowing costs and help boost the Thai economy, which has been underperforming.

Ministers also argued that inflation has been below the central bank’s target range of 1-3% for several months.

In August, consumer prices recorded an increase of 0.35% compared to the previous year, with an eight-month average of 0.15%, a figure that reflected a contraction in the first quarter.

In early October, the president of the Thai Chamber of Commerce, Sanan Angubolkul, explained that lower borrowing costs would help businesses facing high expenses and a strong baht.

Similarly, the central bank governor, Sethaput Suthiwartnarueput, has maintained that rate decisions will be guided by the outlook for domestic economic and financial conditions and inflation.

The central bank stated that economic growth for 2024 will be 2.7%, up from the previously forecasted 2.6%, and trimmed its 2025 forecast to 2.9% from 3.0%.

The main factors driving economic growth in Thailand have been tourism, private consumption supported by government stimulus measures, and improved exports due to higher demand for electronics.

The Thai stock market has responded positively to the Bank of Thailand’s unexpected interest rate cut, with the Stock Exchange of Thailand SET Index advancing by 1.4%. This marks a significant shift in investor sentiment, as the market had experienced 14 days of outflows prior to this rate cut. The infusion of US$126 million of net purchases by overseas investors reflects a renewed confidence in the Thai economy’s prospects.

Furthermore, the rate cut could signal the beginning of a more accommodative monetary policy stance by the Bank of Thailand, which may lead to further easing if the economic conditions warrant it. This proactive approach by the central bank could help to stimulate the economy by encouraging borrowing and spending, and by extension, support the stock market’s performance in the coming months.