Reduction in interest rate aims to stimulate a sluggish economy following extensive government lobbying
PUBLISHED: 16 Oct 2024 at 14:17
UPDATED: 16 Oct 2024 at 15:25
The Bank of Thailand has made a significant move by cutting its key interest rate for the first time in four years, responding to government calls to invigorate the lagging economy amid lower-than-expected inflation rates. 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%, a decrease from the previous 10-year high of 2.50%, which had remained unchanged since September 2023.
Only a minority of economists had anticipated this quarter-point reduction, with only four out of 28 surveyed predicting a change. The central bank last raised rates by 25 basis points in September of the previous year, and this new rate reflects the first cut since May 2020.
The final policy meeting for 2024 is scheduled for December 18, with the government urging the central bank to cut borrowing costs to ignite growth in a struggling economy, especially given that inflation has lingered below the target range of 1-3% for several months.
Consumer prices experienced a slight increase of 0.35% year-on-year in August, contributing to an average growth rate of only 0.15% over the past eight months, indicating economic contraction in the first quarter.
In an official communication after the decision, the Monetary Policy Committee projected that inflation would gradually stabilize within the target range by the end of 2024, stating, “The committee deems that a neutral stance of the policy rate remains appropriate with the economic growth and inflation outlook.”
Sanan Angubolkul, chairman of the Thai Chamber of Commerce, expressed on October 9 that lower borrowing costs are essential for businesses facing elevated expenses and a strong baht. The local currency had surged 14% in the third quarter, making exports less competitive, although it has experienced slight depreciation recently.
Central Bank Governor Sethaput Suthiwartnarueput emphasized that future rate decisions will depend on domestic economic conditions and inflation indicators, noting that merely reducing interest rates may not effectively stimulate the economy, which requires substantial structural reforms.
The region faces challenges, including high household debt levels at 91% of GDP, which has been a recurring argument for maintaining strict monetary policies. The central bank has adjusted its 2024 economic growth forecast to 2.7%, up from 2.6%, while slightly downgrading the 2025 forecast to 2.9% from 3.0%.
The World Bank projects a growth rate of 2.4% for this year, increasing to 3.0% in the next. Key growth drivers have included tourism, private consumption supported by government stimulus, and improved demand for electronics exports. However, the recovery remains uneven across sectors, with various merchandise exports, manufacturing, and small and medium enterprises facing structural challenges.
The committee’s statement highlighted a downturn in business loan growth, particularly for SMEs and consumer credit, with possible credit quality deterioration due to borrowers experiencing slower income recovery and high debt levels.
While the decision to lower rates may temporarily address criticisms of the Bank of Thailand, concerns linger about political influences on the selection of the new central bank chairman. The government is advocating for a candidate who has previously questioned the stringent monetary policy, leading to a delay in the selection committee’s decision.
