BANGKOK — The Bank of Thailand’s decision to reduce the policy interest rate for the first time in 4 years, following a majority vote of 5 to 2 at the Monetary Policy Committee (MPC) meeting on October 16, 2024, to lower the interest rate by 0.25% per annum from 2.50% to 2.25% per annum, came as a great surprise and caused the stock market to close up +19.98 (+1.36%).
Previously, analysts had predicted that the MPC would maintain the interest rate until the December meeting. The Bank of Thailand executives have always demonstrated that the political sector could not interfere. The previous government under Prime Minister Srettha Thavisin had repeatedly called for consideration of this matter but never succeeded. The MPC insisted that the current decision was also not due to political pressure.
Sakkapop Panyanukul, Secretary of the Monetary Policy Committee (MPC) of the Bank of Thailand (BOT), revealed that the interest rate adjustment was still based on three main factors: 1. Economic growth, 2. Inflation rate, and 3. Financial conditions, with emphasis on the issue of “debt” as a priority.
The majority of the committee members believed that the neutral stance of monetary policy remained appropriate for economic and inflation trends. Most members thus voted to cut the policy rate by 0.25 percentage point to alleviate debt-servicing burden for borrowers.
Moreover, the lower policy rate would not impede debt deleveraging given the expected slowdown in loan growth and would remain neutral and consistent with economic potential.
The committee also considered the balance regarding new debt creation, which was a concern. Looking at risk developments, there weren’t many, as it was believed that the cost of this interest rate reduction would not hinder the reduction of the household debt to GDP ratio.
Over the past 10 years, household debt has increased considerably and is higher than in other countries, with the figure in Q2 2024 at 89.6%. Therefore, the policy interest rate doesn’t need to be too high but should be neutral and not too low.
Looking at the data, the economy is expanding close to the assessment, growing by 2.7% this year from an estimated 2.6%, and 2.9% in 2025 from the previous 3.0%. The main driving force is still the tourism sector, private consumption, with additional factors from exports and improved government spending, including the effects of government transfer measures.
As for the inflation rate, it still has developments similar to GDP, consistent with the assessment. This year’s headline inflation is at 0.5% and 1.2% in 2025, expected to return to the lower bound by the end of the year. Factors still include structural problems and the import of cheap goods.
However, concerns about low interest rates leading to “deflation” are mitigated by the fact that prices in many categories are still increasing when looking at the price basket, and people’s incomes remain positive.
Meanwhile, two members voted to maintain the policy interest rate, deeming that it is consistent with the economic and inflation outlook, and to stress the importance of long-term macro-financial stability as well as to preserve policy space amid ongoing uncertainties.
The MPC meeting viewed that the Thai economy is expected to grow close to the projected rates of 2.7% and 2.9% in 2024 and 2025, respectively. The main drivers are the tourism sector and private consumption, which are receiving additional support from economic stimulus measures, as well as improving exports in line with the demand for electronic goods.
However, economic recovery varies across sectors. Exports of certain goods and some industrial production sectors, including SMEs, are still under pressure from structural factors.
Headline inflation in 2024 and 2025 is expected to be 0.5% and 1.2% respectively. Fresh food inflation is likely to rise due to volatile weather conditions, and energy inflation is expected to increase due to base effects. Core inflation is projected to be 0.5% and 0.9% in 2024 and 2025 respectively.
“This interest rate reduction is not the beginning of an easing cycle or a continuous reduction. Rather, it’s an adjustment to observe the effects of this cut. However, we expect that this interest rate reduction will be passed on to financial institutions at a rate similar to previous reductions, which is about half, and we expect the transmission won’t be delayed,” Sakkapop said.
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