The Bank of Thailand unexpectedly lowered its policy interest rate for the first time in more than four years, as inflation is projected to return towards the target range by the end of this year.
The Monetary Policy Committee voted 5-2 to cut the policy rate by 25 basis points to 2.25%. Two committee members sought to maintain the rate at 2.50%.
This was the first reduction since May 2020. Markets anticipated the bank to retain the benchmark rate.
“The Committee deems that a neutral stance of policy rate remains appropriate with the economic growth and inflation outlook,” the bank said. Policymakers observed that the rate cut will alleviate debt-servicing burden for borrowers.
The economy is forecast to grow 2.7% this year and 2.9% in 2025. Tourism, private consumption and improvement in exports are the main drivers of growth.
Headline inflation is projected at 0.5% and 1.2% for this year and next, respectively. Inflation is anticipated to gradually return to the target range by the end of 2024.
The committee deemed that the policy rate should remain neutral and consistent with economic potential.
With growth struggling and inflation very low, there is a very strong case for the central bank to cut further over the coming months, Capital Economics’ economist Gareth Leather said.
The economist said the central bank will cut rates again at its meeting in December and that the policy rate will end 2025 at 1.5%.
ING economist Deepali Bhargava said the bank guidance indicates reluctance to cut rates further as it remains committed to bolster financial stability given uncomfortably high household debt, and price stability highlighting steadily rising core inflation.
Conclusion
The Bank of Thailand’s unexpected interest rate cut reflects its attempt to balance economic growth with inflation management, as inflation is expected to return to the target range by the end of 2024. By lowering the policy rate to 2.25%, the bank aims to alleviate debt burdens while fostering growth in key sectors like tourism and exports.
However, economists are divided on future actions: while some predict further cuts to support sluggish growth, others argue that the bank may be cautious due to concerns about household debt and the need for financial stability. This policy shift signals a nuanced approach in managing Thailand’s post-pandemic recovery.
Via RTTNews
