Thailand's Central Bank Cuts Key Interest Rate

By Kitiphong Thaichareon and Orathai Sriring
BANGKOK (Reuters) – Thailand's central bank unexpectedly cut its key interest rate on Wednesday, stating the decision aligns rates at a "neutral" level consistent with the economy's growth potential. The bank downplayed the influence of government calls for easing policy on its decision.

The 25-basis-point reduction marks the first rate cut since May 2020, following five consecutive meetings of holding rates steady amid government pressure to help revitalize sluggish growth. The benchmark stock index surged by 1.6%, while the baht fell 0.36% following the announcement, which only four out of 28 economists surveyed by Reuters had predicted.

The Bank of Thailand (BOT) stated, "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 monetary policy committee voted 5 to 2 to reduce the one-day repurchase rate to 2.25% from a decade-high of 2.50%, where it had remained since September 2023 after a previous hike.

Assistant governor Sakkapop Panyanukul clarified that it was "not an easing cycle… just recalibrating the policy interest rate" and emphasized it was not a response to political pressure. Deputy Finance Minister Paopoom Rojanasakul indicated that the rate cut could aid growth and signals coordinated fiscal and monetary policies.

In August’s meeting, only one policymaker supported a rate cut, suggesting mounting economic headwinds influenced the other four members, as floods, competition with cheap imports, and factory closures burdened the economy.

Economist Miguel Chanco of Pantheon Macroeconomic noted that the case for further cuts has strengthened due to the rapid appreciation of the baht, predicting another reduction during the next meeting on December 18. Similarly, Capital Economics anticipates a December rate cut, expecting the policy rate to reach 1.5% by the end of next year.

On the same day, the Philippines cut its rates while Indonesia maintained theirs. The BOT raised its 2024 economic growth forecast to 2.7% from 2.6% and projected 2.9% growth for 2025, a decrease from a previous estimate of 3%. Southeast Asia's second-largest economy struggles with high household debt, borrowing costs, and weak exports.

Additionally, the BOT revised its 2024 headline inflation forecast down to 0.5% from 0.6%, below the target range of 1% to 3%. The central bank and Finance Ministry are set to meet again at the end of October to discuss inflation targets.

($1 = 33.34 baht)