On Feb 26, the Bank of Thailand's (BoT) Monetary Policy Committee (MPC) cut its policy interest rate by 0.25%, lowering it to 2.0%.
The previous rate cut was on Oct 16 last year and was also by 0.25%. The latest rate cut was a surprise to many economists as they believed the BoT would not make any more cuts until June for two reasons.
First, inflation is on the rise. Both headline and core inflation rates are on the rise and the BoT might have wanted to wait a few more months to see a clearer inflation direction before making an interest rate decision.
Second, the US Federal Reserve decided to hold its rate stable at 4.25-4.50% in its Jan 29 meeting. A rate cut by the BoT would widen the interest rate gap between Thailand and the US which increased the risk of capital outflow. Expert opinions were pretty much split between a rate cut of 0.25% and no rate cut until a June 25 meeting.
The day before the MPC's meeting, I had a friendly argument on its possible outcome. My friend, who was a BoT executive before retiring, went with the "no cut" outcome, citing the two economic reasons above. Besides, he argued that the MPC did not want to appear to yield to government pressure to lower the rate.
I, on the other hand, went with the "cut" outcome with a vote of 6 to 3, indicating that the majority would be in favour of a rate cut. (I mistakenly thought that the committee comprised nine members.) The bet was a lunch and, therefore, I had a free Japanese lunch coming.
My bet for the "cut" was based on the logic that there were no negatives for the economy, but substantial positives for the MPC.
First, the rate cut would do no harm to inflation. Domestic demand was weak and, most importantly, a rate cut would not lead to credit expansion owing to an existing high level of NPLs. Second, there would be no significant capital outflow as the interest gap between Thailand and US was already wide enough. Capital flowing into Thailand never sought higher investment yields, but came in for other reasons like lending to Thai corporates. The Interest Rate Parity theory was not applicable.
The best benefit of a rate cut was to have the government and the public off the BoT's back. The government and the public had cast the BoT as the villain for obstructing the Thai economy's recovery.
Moreover, consumers and SMEs were choking on high interest rates. The government dramatised the image of having done everything it could while the BoT did not pull its weight. After lowering the rate, the government will need another excuse, and consumers/SMEs will realise the rate cut will make an insignificant reduction to their costs.
Since there were no significant economic adversities, only political benefits for the committee, if I were a member of the MPC, I would surely have voted for "rate cut", which explained why I foresaw a majority decision on the issue.
The pressure for a rate cut was a political issue not an economic one. I felt that the government knew that and had kept its fingers crossed that the arrogant BoT would keep the rate stable and continue to be scapegoat.
Do not forget that the BoT did cut the rate by 0.25% last October. Contrary to the theory, Private Consumption Indicator growth slowed to 2.4% in Q4 compared to 5.2%, 4.6%, and 3.0% expansion rates in three earlier quarters.
Not only did the rate cut occur in Q4, the 145 billion baht cash handout was made in the same quarter. Consumption should have gone through the roof, but the opposite happened.
Of course, I am aware that Q4 GDP growth was 3.2%, the best quarter in 2024, but that is because the NESDC fixes the GDP data. It does not make sense that spending on the "Restaurant and Hotel" category should expand 27.4% in that particular quarter, and expanded 39.4% against the same quarter in 2019 when there was a higher number of foreign tourists with more spending per head.
The figure is simply out of line. I was about to make the case by reporting this abnormality to relevant authorities as accurate GDP data is of national importance. I did a thorough analysis of this abnormality and was certain that I had clear and solid evidence.
However, I decided against such action. The Thai economy will collapse soon and the inaccurate GDP data point will be a minor one.
On the day of the rate cut decision, the stock market reacted positively with a 24.75 point index increase to 1,231.14 or a 2.05% rise as if the market strongly embraced the decision.
In reality, the market actually paid no attention to the rate cut, but the market was manipulated on certain stocks to take advantage of the decision.
If the rate cut was good for the economy as a whole, the stock price rise would've been broad-based. But the price rise focused on two stocks with about a 10% rise on that day.
I can tell the exact reason why and by whom, but I would rather not as I do not want to risk legal liabilities.
Because the index rise did not reflect real market sentiment, the Thai stock market self-corrected and plunged 15.41 points (a 1.25% drop) the following day and continued to drop past 1,200 index points.
The fact that commercial banks, even state-owned ones, reluctantly follow the BoT's rate cut is clear evidence that this measure is powerless and irrelevant. Banks that did lower rates, hesitantly lowered lending rates by 0.1% for most customers, and 0.25% for over-draft accounts.
Did readers notice one missing important thing? No commercial banks trimmed deposit rates as liquidity remained tight.
From the just released January 2025 economic data, it looks like the Thai economy is getting worse. The Private Consumption Indicator only rose 0.3%, following a rise of 2.4% in Q4/2024.
In theory, consumption indicators should have markedly improved in January because of (1) Chinese tourist spending for Chinese New Year which fell in late January, as opposed to mid-February last year, (2) 30 billion baht of cash handouts to senior citizens, and (3) e-receipts for tax deduction programmes.
Weaker consumption is understandable, but shocking things have happened in the financial sector. Commercial banks recalled loans to the tune of 158 billion baht from the private sector, with more than 150 billion baht from Thai corporates.
To avoid a cash shortage, Thai corporates borrowed heavily from abroad. I estimated that about US$5 billion has been borrowed from abroad to repay domestic banks.
Thai corporates have probably reached their credit limits with foreign banks, but their funding needs to remain strong. I am worried about one conglomerate which has borrowed heavily for two years and now faces a huge financing challenge.
Be patient for two weeks. My next article titled "The Titanic" will go into detail about the financing shortage problem. However, do not expect to see the name of the conglomerate. I am too old to be sued.