The Bank of Thailand has unexpectedly cut its key interest rate for the first time in four years, a move long called for by the government as a way to revive a sluggish economy with inflation below target.
The central bank’s Monetary Policy Committee voted 5 to 2 to reduce the one-day repurchase rate by 25 basis points to 2.25%. The rate had been at a 10-year high of 2.50% since September 2023.
Only four of 28 economists surveyed by Reuters had predicted a quarter-point cut this week. Twenty-four respondents had expected no change.
The most recent change in the policy rate was an increase of 25 basis points in September last year. The last time the central bank cut rates was in May 2020.
The final policy meeting of the year will be held on Dec 18.
The Pheu Thai government has been pressing the central bank for months to cut borrowing costs to help spur the underperforming Thai economy. As well, ministers have argued, inflation has been below the central bank’s target range of 1-3% for several months.
Consumer prices in August rose 0.35% from the year before, bringing the eight-month average to 0.15%, a figure that reflected a contraction in the first quarter.
In a statement released after the meeting, the MPC said it expected inflation to gradually return towards the target range by the end of 2024.
“The committee deems that a neutral stance of the policy rate remains appropriate with the economic growth and inflation outlook,” it said.
Thai Chamber of Commerce chairman Sanan Angubolkul said on Oct 9 that lower borrowing costs would help businesses grappling with high expenses and a strong baht.
The local currency surged 14% in the third quarter, making the country’s exports more expensive compared to those of competitors. It has weakened slightly in recent days.
Central bank governor Sethaput Suthiwartnarueput has maintained that rate decisions will be guided by the outlook for domestic economic and financial conditions and inflation.
He also has said that lower interest rates would not do much to spur the economy, which needs major structural reforms.
As well, high household debt, at 91% of gross domestic product, has been cited frequently as an argument for maintaining tight monetary policy.
The central bank raised its 2024 economic growth forecast to 2.7% from 2.6% predicted earlier, but trimmed its 2025 forecast to 2.9% from 3.0%.
The World Bank has forecast the economy will grow by 2.4% this year and 3.0% next year.
The main drivers of growth have been tourism, private consumption that is further supported by government stimulus measures, and improvement in exports given higher demand for electronics.
“However, the recovery has been uneven across sectors, with certain merchandise exports, manufacturing production, as well as SMEs facing pressure from structural impediments,” the MPC statement said.
The statement also noted that business loan growth has declined, especially loans to SMEs, as well as hire-purchase and credit-card loans.
“Credit quality has deteriorated, partly due to debtors who have previously received financial assistances, as well as SMEs and vulnerable households experiencing slower income recovery and elevated debt burdens,” it said.
While Wednesday’s decision might placate critics of the BoT for a while, manoeuvring to influence the choice of a new central bank chairman remains a concern.
The government favours former commerce minister Kittiratt Na-Ranong, a critic of the hawkish monetary policy and a Shinawatra family loyalist, for the job. Concern about political pressure caused the central bank’s selection committee to postpone its decision recently.