The Bank of Thailand unexpectedly lowered its key interest rate and signaled that its easing cycle could soon draw to a close if the economic recovery gains sufficient momentum. Stocks rose while the baht erased earlier gains.
The central bank’s Monetary Policy Committee voted four to two on Wednesday to cut the one-day repurchase rate by 25 basis points to 1%, the lowest level since September 2022. Only three of 23 economists surveyed by Bloomberg had predicted the move, with the rest seeing no change. The meeting was attended by six members, with one seat on the committee still vacant.
“Today’s cut is a surprise, but only on timing,” newly-appointed Assistant Governor Don Nakornthab said in a news briefing after the decision. “We just brought forward the cut to help the economy for a couple of months more. This is just a front-loaded cut.”
The preemptive move highlights the central bank’s desire to shore up a tentative recovery. While the Thai economy saw stronger-than-expected growth last quarter and political uncertainty has eased since the Feb. 8 election, policymakers remain wary that high household debt and tight financial conditions could disrupt the uptick in consumption and investment.
Thai baht erased an earlier advance to slip less than 0.1% lower to 31.063 per dollar, underperforming emerging-market peers. The benchmark stock index rose as much as 2.2%.
“We do not think this marks the end of the easing cycle,” Gareth Leather, a senior economist at Capital Economics who correctly predicted Wednesday’s cut, said in a text message. “With growth likely to struggle and inflation pressures extremely weak, we expect at least one additional 25 basis point cut before the cycle concludes.”
While the central bank is not closing its door to another rate cut if the situation worsens, it will also look to conserve its limited policy space with the key rate nearing the record low of 0.5%, the BOT’s Don said.
“The current rate is sufficient under the current assessment. If the situation is in line with expectation, this can be considered as the end of the cycle,” he added.
The surprise cut came after upbeat remarks from Finance Minister Ekniti Nitithanprapas, who this week said the economy is out of “the ICU” — the intensive care unit. But the central bank made it clear the economy still needs help.
“Economic growth is projected to remain below potential in 2026 and 2027 and uneven across sectors, reflecting structural impediments and intensified competition,” the Bank of Thailand said. The current interest rate “reflects a sufficiently accommodative monetary policy stance and aligns with the economic outlook, while being conducive to the gradual return of inflation to the medium term target range.”
The Bank of Thailand said it’s also monitoring for deflation risks. Inflation has been in negative territory for the past 10 months.
Headline inflation likely won’t return to the 1%-3% target range until the second half of 2027, later than initially forecast, the BOT said. It argued that below-potential economic growth, weak purchasing power, easing energy prices and other government measures could dampen price pressures this year and next.
The central bank is also closely monitoring the currency amid signs the exchange rate is misaligned with economic fundamentals. The baht has gained 8.5% in the past year to be Asia’s second-best performer.
The appreciation has tightened financial conditions for exporters, especially those facing intense price competition and low profit margins, the BOT said. While lenders have gradually followed the BOT’s past rate cuts, small and medium enterprises still face high borrowing costs and credit remains weak, it added.
Capital Economics’ Leather noted the BOT’s statement shows its primary concerns are growth and inflation. The fourth-quarter rebound was partly driven by a surge in state spending, largely reflecting one-off election measures, he said, with the government’s tight fiscal targets meaning growth will remain lackluster this year.
Source: bloomberg