The US economy is expected to enter a cyclical slowdown from late 2024 through to 2025, leading the Bank of Thailand to cut its policy rate by as much as 1.5 percentage points next year alone, says KGI Securities (Thailand).
The cyclical slowdown will see the labour market normalise and US consumers feeling a more pronounced impact from high interest rates, KGI said in a report jointly prepared by market strategist Rakpong Chaisuparakul and economist Pragrom Pathomboorn.
Coupled with US inflation declining, there is room for the Federal Reserve to cut interest rates more aggressively to buffer the economy.
"We believe recession risk remains low and the coming interest rate cuts should be able to engineer a transition to more normalised growth in the US," noted the report.
The US labour market has slowed significantly, though it is in the early stages, which could drag on other economic activities. To prevent unfavourable economic conditions, rate cuts are needed to prevent the economy from entering recession, and "higher rate cuts are needed in the first stage" to take the interest rate lower and closer to a normal level, according to the report.
"The federal funds rate [FFR] is now at its cycle peak and is expected to enter a downward cycle from September 2024 through to June next year," it said, noting the Fed could cut the rate by a total of two percentage points in the cycle, resulting in the FFR falling from 5.25-5.50% to 3.25-3.50% in 2025.
"Locally, the central bank's Monetary Policy Committee is likely to stay put through 2024 before fixing its overly-tight bias by cutting the policy rate a total of one percentage point to 1.50% in 2025 to ease the pressure on Thai consumers and debtors," the report noted.
KGI analysts conducted an analysis on the impact of cutting Thai interest rates by 0.25 to 1 percentage point and found the utilities, ICT and finance sectors would see significant benefits from lower rates.
"For the finance sector, share prices may not react to a falling interest rate in the near term as investors remain cautious about asset quality and confidence in the Thai debenture market," noted the report. "On the negative side, Thai interest rate cuts in 2025 could be negative to the net margins of big banks, but the actual impact could be partially offset by possible improvement in Thai GDP growth as interest rates edge down."
In a separate report, financial analyst Chalie Kueyen said if the Bank of Thailand cuts the policy rate by 1 percentage point within a year, it would be negative to the operations of all banks and could drag earnings down by 20-30% in the worst case. Banks would have to cut expenses or credit costs, he said.