The Monetary Policy Committee (MPC) unexpectedly lowered the policy interest rate by 25 basis points yesterday to 2.25% following rising downside risks to growth partly triggered by the ongoing political tensions.
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The Bank of Thailand's rate-setting committee also slashed its 2013 gross domestic product (GDP) growth forecast to 3% from 3.7% predicted in October.
It voted 6-1 to reduce the benchmark interest rate by 0.25%, the second rate reduction this year. The minority view was that 2.5% was sufficiently accommodative.
"Since the Thai economic growth has been lower than expected, the MPC sees the need to maintain the accommodative monetary policy stance for a certain period," said Paiboon Kittisrikangwan, an assistant governor of the central bank and secretary to the MPC.
Disappointing third-quarter growth also contributed to the move.
The Thai economic growth increased by 2.7% year-on-year in the third quarter, down from 2.9% in the previous quarter and 5.4% in the first, as both domestic consumption and private investment lost momentum, while exports did not gain traction.
The MPC deems there is room to relax the monetary policy to mitigate downside risks to the economy given benign inflation outlook and moderating household credit growth.
The surprise rate cut also gave a boost to the Thai stock market, with the index surging 1.06% yesterday to close at 1,373.11 points in moderate trade worth 35 billion baht. Property development stocks were among the gainers as investors bet they will benefit from the rate reduction.
Mr Paiboon said the committee did not make the decision based on domestic political developments alone. Other factors such as weak exports, falling consumption and a slowdown in public and private investment were taken into consideration.
Earlier, the MPC kept the policy rate unchanged at 2.5% at its Oct 16 meeting after cutting it by 25 basis points from 2.75% in May. Despite concerns a rate cut will heighten the risk to capital-flow volatility, the central bank believes high foreign reserves and a floating exchange rate system will soften the blow, said Mr Paiboon.
He noted the decision is not a substitute for the government's budget disbursement delays, as the rate cut is intended to mitigate downside risks to the economy.
But the lower 2013 GDP growth projection does not take into account the possibility of greater political uncertainties, said Mr Paiboon.
The expansion is predicted to come in just above 4% next year, down from an earlier projection of 4.8%.
Thailand will reap the benefits of a rebound in exports on the back of global economic recovery, while public investment will remain a crucial factor accelerating the growth, he said.
Kobsak Pootrakool, an executive vice-president of Bangkok Bank, said the rate cut indicates the economy is expanding at a slower pace than expected, and the political turmoil can be blamed for the slowdown.
The latest move could be more successful in persuading banks to follow suit than the recent rate cuts, as lending growth is decelerating at the moment, he said without commenting on whether his bank will do the same.
Voravan Tarapoom, the chairman of BBL Asset Management, said the risk of a delay in government investment is increasing, while the political situation continues to erode private confidence.