The Bank of Thailand no longer has any reason to refrain from reducing its policy interest rate, says a senior official of the Ministry of Finance.
Central banks should remain independent, with committees to determine policy rates, said Pornchai Thiraveja, director-general of the ministry’s Fiscal Policy Office (FPO).
“Each country operates like this, and when setting interest rate policies, they must assess the current and future economic situations and key variables related to inflation, such as employment rates and growth rates, which are crucial factors,” he said on Friday.
“For example, recently both the US Federal Reserve and the Bank of England kept their interest rates unchanged. The main reason for maintaining interest rates is that the inflation rates of both countries are still high and have not returned to the target range.”
Conversely, if inflation rates stay relatively low, a flexible interest rate and accommodative monetary policy should be considered, he said.
Policymakers must consider whether the rate level will affect economic and monetary stability, said Mr Pornchai.
Thailand’s inflation rate in February was -0.8%, the fifth consecutive month of contraction, and headline inflation is projected to be just 1% for the whole year, at the low end of the 1-3% range set by the central bank’s Monetary Policy Committee (MPC).
The current benchmark interest rate of 2.50% is the highest in a decade, and Prime Minister Srettha Thavisin has been among those complaining loudly that the high rate has been a drag on economic growth.
The MPC will hold its next rate-setting meeting on April 10, when observers expect members to send a clear signal about when rate cuts could start.
“The market anticipates the MPC will reduce the policy rate twice this year, which should help speed up the economic recovery in 2024,” said Mr Pornchai.
When deciding on rates, officials “also have to consider whether the central bank’s policy space is sufficient”, he said.
“If there is sufficient policy space and it can be used to reduce interest rates, a rate cut could benefit overall economic development.
“However, if there is ample policy space but it is not utilised, I believe there will be no benefit, as the conditions to nudge inflation rates towards the target range have already been achieved.”
High household debt, exacerbated by high interest rates, has been a major challenge for policymakers in Thailand. But Mr Pornchai said any impact from a rate cut on those debt levels is unlikely to be immediate.
Typically, if the policy rate is lowered, financial institutions will not immediately reduce their lending rates because they need to manage higher financial costs, he said.
According to Mr Pornchai, analysis indicated that if the interest rate is reduced by 25 basis points, it would increase domestic consumption by 0.15% and investment in Thailand by another 0.16%.
High interest rates, he said, affect production costs and the country’s competitiveness, resulting in higher product prices.
Once prices rise, selling products will be more difficult, affecting entrepreneurs’ income and causing a chain reaction in the economy, dampening investment and domestic consumption, said Mr Pornchai.
Another concern is the proportion of loans classified as special mention (SM), meaning loans overdue by more than 30 days but less than three months, which remain high.
In December, SM loans made up about 4% of total credit outstanding, but looking at individual financial institutions, some have a ratio as high as 7%, he said.