The battle over interest rates
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The battle over interest rates

The premier is pushing the central bank for a cut, but the regulator has several issues to consider other than an economic bump

The government continues to pressure the Bank of Thailand to cut interest rates sooner rather than later, with some money managers and companies approving such a move. Bloomberg
The government continues to pressure the Bank of Thailand to cut interest rates sooner rather than later, with some money managers and companies approving such a move. Bloomberg

A rift over interest rates between Prime Minister Srettha Thavisin and the Bank of Thailand, led by governor Sethaput Suthiwartnarueput, has remained in the media spotlight for months.

The last two meetings of the Monetary Policy Committee (MPC) were scrutinised as some government officials and businesses thought the central bank should lower the policy rate.

The MPC is scheduled to meet six times in 2024, with the first round on Feb 7 ending with a decision to maintain the rate at 2.5%.

With the next session slated for April 10, the government is pushing for an "urgent", unscheduled meeting to cut the rate before then, citing an economic "crisis". This idea is supported by several companies that indicate they have been affected by higher interest rates over the past year.

However, the central bank and some economists insisted the process should not be rushed, as any interest rate moves would not instantly remedy the situation as the government desires.

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The MPC voted 5-2 to maintain the policy rate at the latest meeting, with two members opting to cut the rate by a quarter of a percentage point.

Most committee members agreed that maintaining the policy rate at the current level would help promote sustainable economic growth, which requires financial stability, according to the edited minutes of the MPC meeting.

The five members voting to maintain the rate attributed the slowing economic growth to external and structural factors, while domestic demand continued to expand.

"An interest rate cut at this juncture would likely do little to spur economic growth given already robust domestic demand," according to the report.

Monetary easing cannot resolve structural impediments, a root cause of the recent growth slowdown. The benefits of utilising valuable policy space appear limited, noted the report.

More evident structural issues and possibly lower potential growth could have implications for the neutral interest rate level, but such an impact remains highly uncertain and would likely be quantitatively small, said the MPC, adding more data and further investigation are needed to shed more light on the link.

The costs to macro-financial stability associated with overly expansionary monetary policy remains a concern. With monetary policy stimulating credit, policy easing could forestall the deleveraging process and keep debt levels high, said the committee.

"Undue monetary policy easing could intensify search-for-yield behaviour, lessen incentives to engage in productivity-enhancing activities, deter necessary resource reallocations, and add financial fragilities to the system," according to the report.

"Policy needs to be flexible and attuned to the evolving growth and inflation outlook and associated assessments."

Apichart Kasemkulsiri, chief executive and chief financial officer of L.P.N. Development Plc, said reducing interest rates must be considered from various angles and should follow the US Federal Reserve's actions, as the residential sector is only one part of the economy.

"Cutting rates regardless of financial stability may lead to capital outflows, potentially weakening the currency," said Mr Apichart, formerly senior executive vice-president of Industrial and Commercial Bank of China (Thai).

"This would impact certain sectors and ultimately affect the economy."

Auto loans are offered at last year's Money Expo.


Two MPC members voted to cut the policy rate because they believed the neutral interest rate may have significantly declined, attributed to a lower potential growth rate amid intensifying structural impediments.

Moreover, a more accommodative policy stance, despite having limited impact on growth, could help mitigate downside risks to the economy, particularly if a sluggish recovery in exports and related manufacturing were to affect employment conditions and put at risk the sustainability of private consumption, according to the minutes of the meeting.

Pimnara Hirankasi, chief economist of Krungsri Research, expects several central banks to begin cutting policy rates in the middle of this year, led by the Fed.

"There is a greater possibility the Bank of Thailand will begin to cut its rate in the second half as a result of low inflation and economic growth," she said.

"However, rate cuts by the Fed and the Thai central bank would not be directly related."

The market expects the MPC to cut the policy rate once or twice this year, said Ms Pimnara, but forecasts the Fed may slash its policy rate aggressively by 75-100 basis points this year.

Wongsakorn Prasitvipat, managing director of Property Perfect Plc, said the MPC may cut rates by mid-year, following the Fed's decision to reduce rates.

"If interest rates in Thailand are reduced three times following Fed moves this year, it will be a significant change for the economy, including the housing market, as it will result in a 5% increase in home purchasing power," said Mr Wongsakorn.

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Every 1% increase in interest rates causes a 7-8% decrease in home purchasing power, severely affecting middle- to low-income earners, according to residential developers.

Uthai Uthaisangsuk, president of SET-listed Sansiri, said elevated interest rates the past two years, rising from 0.5% to 2.5%, has affected home purchasing power by 15%.

"Homebuyers who could afford a residential unit priced at 10 million baht early last year can no longer afford it following five interest rate hikes," said Mr Uthai.

"They must opt for a unit priced at 8.5 million baht instead."

He said the impact on housing market sentiment began in the third quarter of last year, following the central bank announcing a rate hike of 25 basis points to 2.25% on Aug 2, 2023, which was the fourth such increase of the year.

The effect became more pronounced after the fifth increase, rising to 2.5% on Sept 27, leading to fewer customers visiting housing project sites and a slowing sales rates, said Mr Uthai.

In the fourth quarter last year, the impact was evident as the number of residential unit transfers nationwide dipped 12.7% year-on-year to 96,163 units, according to the Real Estate Information Center (REIC).

Transfers declined for four consecutive quarters last year, but the fourth-quarter fall was the largest, plunging by double digits for the first time since the third quarter of 2021, when the pandemic drove a drop of 21.3%, noted the centre.

The number of residential units transferred nationwide in 2023 declined by 6.6% to 366,825 units valued at 1.04 trillion baht, a decrease of 1.7%.

This suggests the majority of units transferred were at higher prices, according to the REIC.

Vichai Viratkapan, acting director-general of the REIC, said there was a decline in new residential units priced 5 million baht and lower because of the interest rate hikes, the economic slowdown and stricter mortgage rules.

"Purchasing power in the middle to lower-end segment, meaning units priced 5 million baht and lower, has been weaker since last year and will continue in 2024," he said.

This trend began in the fourth quarter of last year, when new mortgages fell by 14.8% to 177 billion baht, said the centre.

This decline was the largest since the third quarter of 2019, when new mortgages contracted by 16.2%.

"The lower the interest rates, the better it will be for homebuyers," said Mr Uthai.


Despite some pressure on the central bank to reduce the policy rate, the regulator must determine the most suitable rate for the entire economy, said the Federation of Thai Industries (FTI).

"Lower policy rates do not always lead to higher purchases of cars in Thailand because there are different issues that affect sales," said Surapong Paisitpatanapong, vice-chairman of the FTI and the spokesman for the FTI's Automotive Industry Club.

Domestic car sales, especially in the pickup segment, did plunge as banks adopted stricter criteria for auto loans to ward off non-performing loans, said Mr Surapong.

But if the government wants to help car manufacturers increase sales, it needs to seriously tackle high household debt levels, he said.

Easing debt levels may satisfy banks, eventually causing them to adjust loan criteria for prospective car buyers, said Mr Surapong.

He said a suitable policy rate is one that allows both businesses and households to benefit.

"Setting an appropriate rate can be one way to drive the Thai economy," said Mr Surapong.

A rate cut could lead to the unpleasant prospect of capital outflows, baht depreciation and higher costs for raw materials, which affects manufacturing, he said.

But if the policy rate remains high, it will continue to affect both households and businesses, making consumers more cautious about spending while entrepreneurs will struggle with financial costs, said Mr Surapong.

Whether policy rates change also depends on external factors, especially the interest rate policy of the Fed, he said.

Jariya Koonlinthip, chief executive of BMW Leasing (Thailand), said many car companies are working harder as the loan rejection rate, especially in the pickup segment, is high.

Some sellers are adjusting by increasing down payments to reduce the burden from monthly instalments, she said.


Sanan Angubolkul, chairman of the Thai Chamber of Commerce, said Thailand's economic fundamentals are sound, but the Finance Ministry, which oversees public finance, and the central bank, which supervises domestic macroeconomic and financial conditions, should collaborate.

He said the private sector believes Thailand's economy is recovering slowly and requires support to reduce costs as well as measures to stimulate the economy, such as injecting funds into the economy and implementing relief measures for vulnerable groups.

"The prime minister visited various provinces to see the hardships faced by vulnerable populations," said Mr Sanan.

"He is worried about the plight of the business sector, especially small and medium-sized enterprises, and advocated for an interest rate cut."

The private sector believes lower rates will ease the financial burden on businesses, he said.

When enterprises do not have excessive costs, consumers stand to benefit, said Mr Sanan.

In addition, efforts are needed to facilitate private sector access to funding sources, he said.

"Using both fiscal and monetary measures will play a crucial role in ensuring the stability of the economy. The prime minister is determined to see an interest rate cut," said Mr Sanan.

"The private sector does not have comprehensive information about the state sector, but we agree that reducing interest rates would be beneficial for entrepreneurs to conduct business."

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