The showdown over interest rates

The showdown over interest rates

The prime minister is badgering the central bank over a reduction, but the regulator won't show its hand

Mr Srettha recently slammed the central bank for keeping interest rates elevated. (Photo: Nutthawat Wichieanbut)
Mr Srettha recently slammed the central bank for keeping interest rates elevated. (Photo: Nutthawat Wichieanbut)

Tensions are growing as Prime Minister Srettha Thavisin and the Finance Ministry continue their stand-off with the Bank of Thailand after the premier repeatedly suggested the central bank should cut interest rates as inflation has subsided.

Mr Srettha, who is also the finance minister, posted on X on Sunday night, accusing the central bank of damaging the economy by keeping its interest rate elevated even though inflation has waned for months.

This followed his speech in parliament on Jan 3 that suggested the central bank should take into account risks to the nation's economy, including its fragile recovery, when deciding monetary policy.

"Monetary policy going forward should be in line with economic trends, tighter financial conditions and the boost from government policies," said Mr Srettha.

On Monday, he reiterated his stance on interest rates.

"As inflation is very low, an interest rate reduction should be considered," said Mr Srettha.

Kittiratt Na-Ranong, the premier's chief advisor, said a substantial and quick interest rate reduction is "the way out of economic problems", noting the central bank should support the government's policies.

These statements indicate not only a policy disagreement between the government and the central bank, but also hint at intervention in the Bank of Thailand's role, which is supposed to be independent.

Although the central bank has signalled it does not foresee a need to tighten rates further, Bank of Thailand governor Sethaput Suthiwartnarueput's comment that the recent decline in consumer prices is a result of state subsidies show the regulator may be hesitant about easing rates anytime soon.


While the central bank did not respond to the prime minister, its Monetary Policy Committee (MPC) has hinted at an extended pause for rate hikes to avert any potential shocks to the economy and the financial system amid an uncertain outlook.

The MPC began lifting rates in August 2022, increasing them by 0.25 percentage points eight times, bringing the borrowing cost to a 10-year high of 2.5% in September last year.

The committee halted the interest rate hikes in November 2023. The MPC's next meeting on the policy rate is scheduled for Feb 7.

Thailand's policy rate is the lowest in Southeast Asia, with the average for the region 3.25% to 3.5%.

Inflation in Thailand is also lower than its regional peers.

According to Asia Plus Securities (ASPS), Thailand's real interest rate exceeds 3.33%. Based on past statistics, Thailand's interest rate was usually cut 3-12 months after Thailand's real interest rate was higher than the US's rate, said the brokerage.

Consumer prices in Thailand have been in deflationary territory for three months through December, with a contraction of 0.83% in the final month of 2023, prompting some economists to predict rising odds of a rate cut later this year.

But Burin Adulwattana, managing director of Kasikorn Research Center, said while there's room to cut the rate later this year, deflation alone can't be the deciding factor.

"The Bank of Thailand will need to consider other economic factors as well, especially the government stimulus measures," he said.

"If the digital wallet scheme fails, that may be the key push for further accommodative monetary policy," Mr Burin said, referring to the 10,000-baht digital handout to 50 million Thais.


Normally the MPC takes into consideration three factors when determining the policy rate: the inflation rate, economic growth and financial stability in managing monetary policy.

While the government is pushing for an interest rate cut to help propel the economy, the MPC has noted the interest rate is at a neutral rate now.

Cutting the rate would help in easing non-performing loans in the banking sector, which are expected to increase this year in line with the economy and higher interest rates as household debt swells.

Yet inconsistent monetary and financial policies make them less effective, ASPS said in a research note.

"Thailand's interest rate is 2.5%, the highest in 10 years, while Thailand's inflation shrank three consecutive months from October to December 2023," ASPS stated.

"The central bank views the Thai economy as recovering and an interest rate of 2.5% as neutral. Yet the government sees Thailand's economy as in a crisis."

Cutting the interest rate is projected to weaken the baht by 0.87% to below 35 to the US dollar as of Monday, making the Thai currency the weakest among Asian currencies this year to date, according to the brokerage.

A weaker baht will lower fund inflows and trigger foreign selling in the short term, noted ASPS. However, a lower Thai interest rate would increase risk assets and fund inflow in the future, said the brokerage.

Senator Sathit Limpongpan said the central bank, which is responsible for supervising commercial banks, must ensure there is a balance between the growth of financial institutions and the quality of the services people receive from them.

"The Bank of Thailand must ensure fair competition among banks as well as good customer service," said Mr Sathit, a former permanent finance secretary.

"Intense competition among banks will benefit consumers, but the central bank must respond to people's needs by expanding access to funding."


Economists are predicting the Bank of Thailand will start cutting its policy rate in the second half of this year based on economic projections and the likelihood of the Federal Reserve cutting rates in the second quarter.

The Fed is expected to begin trimming its policy rates in May this year, prompting the Bank of Thailand to consider narrowing its gap with US interest rates to contain foreign capital outflows.

Amonthep Chawla, chief economist of CIMB Thai Bank, said he expects the central bank to cut its policy rate two times in the third and fourth quarters this year, starting in August.

Policy rate cuts of a quarter-point per reduction to 2% by year-end are projected, said Mr Amonthep.

Naris Sathapholdeja, chief economist of ttb analytics, the research unit under TMBThanachart Bank (ttb), said he anticipates the central bank holding its rate unchanged at 2.5% throughout the year in the base-case scenario.

However, Mr Naris said there is a greater possibility the central bank would begin to cut its rate in the second half as a result of low inflation and economic growth.

Economic growth that missed targets in 2023 and 2024 as well as declining inflation would support a policy rate cut in the second half, he said.

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