The Bank of Thailand's decision to cut the policy interest rate by 25 basis points to 1.75% last Wednesday is unlikely to have a significant effect on credit risk in the country, according to Fitch Ratings.
Inflation remains well below the central bank's target while headline consumer price index falling into negative territory at -0.5% year-on-year in February has given the central bank some space to cut the policy rate, the rating agency said in a statement on Monday.
The relative strength of the baht is also likely to have influenced the rate decision.
But high leverage in the private sector remains "a key source of vulnerability for the wider economy and banking sector".
"Should further monetary easing result in a rapid re-acceleration in credit growth, this would increase the risks to banks' asset quality," Fitch said.
Fitch estimates Thailand's private-sector leverage reached 159% of GDP in 2014, significantly higher than the median (61%) of its BBB-category peers. The aggregate figure has been driven largely by rapid growth in household debt, which rose to 85% of GDP in 2014 from 56% in 2008.
So far, banks' asset quality has held up despite the marked slowdown in economic growth in 2014. At the same time, banking sector non-performing loans (NPLs) were largely unchanged from 2013, at 2.6% in December.
Loan growth has slowed significantly in 2014 along with the broader economic deceleration, and this has been a positive credit factor for the banks.
"Asset quality as a lagging indicator means that we could yet see a deterioration in NPLs in 2015 should the economic slowdown continue. Nevertheless, Fitch's base-case scenario is for real GDP growth to rebound to 3.5% in 2015," it said.
The Bank of Thailand also on Monday said the rate cut had caused the baht to weaken to 32.94 baht from 32.80 against the US dollar.
The yield of 10-year government bonds also fell from 2.74% to 2.49% last Saturday, the lowest level in six years, said spokesman Chirathep Senivongs Na Ayudhaya.
"The financial cost has thus far been very low and the situation is conducive to investment in the private sector," he said.
Monetary policies could cushion the negative economic impacts only temporarily and that the long-term economic growth of the country would depend on the competitiveness of its products and national reform, especially on the tax system.