Thai Central Bank Cuts Interest Rate Amid Economic Headwinds

 

In a unanimous decision, Thailand's Monetary Policy Committee (MPC) has voted to cut the policy interest rate by 0.25%, bringing it down from 1.75% to 1.50%.

 

The move, announced at the committee's fourth meeting of the year, is a strategic effort to address growing vulnerabilities in certain sectors of the economy, particularly among small and medium-sized enterprises (SMEs) and low-income households.

 

While the MPC acknowledged that Thailand's overall economic growth for 2025 and 2026 is projected to remain near previous estimates, it expressed concern that new US tax measures would exacerbate existing structural problems and diminish the country's competitive edge.

 

Sakkapop Panyanukul, the MPC Secretary, clarified that the rate reduction wasn't triggered by a significant change in the overall economic outlook. Instead, it was a proactive response to the increasingly challenging financial conditions faced by specific groups. 

 

He noted that while the overall economy isn't as severe as during the COVID-19 pandemic, some areas, such as credit availability for SMEs with sales under 20 million baht, are showing persistent weakness. 

 

This tightening of credit, coupled with a decline in loan demand from large corporations due to economic uncertainty, has led to a continuous contraction in lending.
 

 

 

A Focus on Vulnerable Groups

The primary objective of the rate cut is to provide a more accommodative financial environment, supporting businesses' ability to adapt and alleviating the burden on vulnerable groups. 

 

The MPC's decision was informed by a forward-looking analysis of significant risks, with a particular emphasis on the impact of US tax policies and their potential to worsen the country's competitive position.

 

The committee highlighted that while some sectors have benefited from recent economic policies, many vulnerable groups are struggling.

 

Sakkapop stated, "The interest rate reduction is specifically aimed at creating a financial environment that allows these affected groups to better adapt." 

 

He also emphasised that the decision was not tied to hitting a specific GDP target but was a direct response to the widening scope of economic vulnerability.

 

 

 

Limited Policy Space

Looking ahead, the policy rate could be lowered further, as it remains above the all-time low of 0.50% seen during the pandemic. 

 

However, the MPC acknowledges that the effectiveness of each subsequent rate cut diminishes as the rate nears its lower bound.

 

Sakkapop stressed the importance of carefully weighing future decisions, as each reduction naturally reduces the available "policy space."
 

 

Deputy Prime Minister and Finance Minister Pichai Chunhavajira welcomed the rate cut, calling it a "good sign." 

 

He revealed plans to hold close discussions with the Bank of Thailand to increase liquidity in the financial system. 

 

"We and the Bank of Thailand are now on the same page," he said, suggesting that greater liquidity and government spending would help stabilise the currency and benefit exporters.

 

Leading economic experts and business leaders have also responded positively. 

 

Nonarit Bisonyabut, a senior researcher at the Thailand Development Research Institute (TDRI), viewed the rate cut as a signal that the MPC is prepared to adopt a more relaxed monetary policy to counteract a slowing economy. 

 

Kriengkrai Thiennukul, president of the Federation of Thai Industries, and Poj Aramwattananont, chairman of the Thai Chamber of Commerce, both praised the decision for reducing the financial burden on businesses and boosting investment. However, they also urged the government to manage the Thai baht's strength, which they said is eroding the country's export competitiveness.