The Federal Reserve's large interest rate cut of 0.5 percentage points this week, the first reduction in four years, could pave the way for the Bank of Thailand to slash its policy rate in December, says CIMB Thai Bank chief economist Amonthep Chawla.
Mr Amonthep said the "aggressive" cut is probably aimed at restoring market confidence, with smaller reductions likely later this year.
The US central bank late Wednesday voted to cut the federal funds rate 50 basis points (bps), bringing it down from a two-decade high to 4.75-5.00%. Though the reduction was larger than the economists' consensus, it was in line with Fed Futures pricing and earlier moves in bond markets.
The Fed's dot plot, a chart updated quarterly that records each Fed official's projection for the central bank's key short-term interest rate, indicates a rate reduction of one percentage point by year-end, meaning two more cuts of 25 basis points each this year.
"I view the aggressive cut as having the potential to restore the market's confidence at a certain level, bolstering belief the central bank is handling the economic conditions. The economic growth forecast of 2% this year and next also reflects that the US economy is expanding well," said Mr Amonthep.
He said he believes the Fed rate cut would prompt the Bank of Thailand to follow suit, most likely this December.
"Despite economic stimulus, the Thai economy is growing at a low rate, especially with the ongoing floods. I think the Bank of Thailand's meeting in October will maintain the policy rate to wait for the release of third-quarter GDP, the Fed's next move in November, and most importantly the result of the US presidential election," said Mr Amonthep. "A rate cut in December is not too late."
A rate cut should lift the economy over the next six months, supporting GDP expansion of about 3% in 2025, he said.
Eastspring Thailand views the Fed rate cut as intended to prevent the US economy from sliding into a recession, as the central bank raised the projection for the unemployment rate to 4.4% for 2024 from 4.0%.
The projected US interest rate for 2025 is 3.4%, compared with a June projection of 4.1%, meaning four more cuts next year, according to the brokerage.
Eastspring Thailand said the recent Fed cut is already behind the curve and it is possible the regulator may slash rates more than the dot plot suggests next year, noting the US economy still has a chance of recession.
The 50-bps cut and the dovish tone of the Fed statement, along with the uptick of the unemployment rate forecast, reflect that the central bank is afraid that economic conditions will worsen, though the rate cut may have a positive short-term impact on the stock market, noted the brokerage.
"The Fed cut its GDP forecast for this year to 2.0% from 2.1%, while raising its unemployment rate forecast for the next three years from 4-4.2% to 4.3-4.4%, which is where we expect the Fed to cut rates to avoid a recession," said Eastspring Thailand.
InnovestX Securities said the Stock Exchange of Thailand has a limited upside, while the Fed's move may support short-term investment in risky assets. Investors should remain cautious about the Bank of Japan's monetary policy, which will result in yen carry trade and trigger the sale of risky assets globally.