Central bank maintains Thailand’s policy rate at 2.5%
The Bank of Thailand (BOT)’s Monetary Policy Committee (MPC) has decided to maintain the policy rate at 2.5%, as it had done in its two previous meetings since November last year.
Piti Disyatat, MPC secretary, said the committee voted 5:2 on Wednesday to maintain the key rate, though two members voted to cut the policy rate by 0.25 percentage points.
In a statement after the meeting, the central bank said the Thai economy is projected to grow at a higher rate this year compared to last year, with continued support from private consumption and tourism. Public expenditure is also anticipated to accelerate for the remainder of the year.
“Structural headwinds continue to weigh on export recovery,” the BOT said. “Inflation remains subdued from supply factors and government subsidies and is projected to gradually shift towards the target range by the end of 2024.”
The BOT said most MPC members believe the current policy rate is conducive to safeguarding macro-financial stability and that the effectiveness of a monetary policy resolving structural impediments is limited.
“Thus, most members voted to maintain the policy rate at this meeting but will monitor uncertainties of economic factors going forward. Two members voted to cut the policy rate by 0.25 percentage point to reflect low growth potential in Thailand due to structural challenges and to partly alleviate the debt-servicing burden of borrowers,” the statement read.
The BOI also reported that the Thai economy in the second half of 2023 had slowed down more than anticipated due to sluggish export recovery, delayed government budget disbursement, and higher-than-normal inventories. These downside factors are expected to subside this year, causing the Thai economy to grow at 2.6% and 3% in 2024 and 2025, respectively, faster relative to the previous year. Such economic expansion is supported by three factors: an improvement in the tourism outlook, both in the number of foreign tourists and spending per head; continued expansion of private consumption despite being moderate compared to high growth last year; and an acceleration of public expenditure in the remainder of the year.
In contrast, the export sector is expected to recover only gradually in the second half of this year. The decline in Thai economic growth after the Covid-19 pandemic reflects the impact of structural headwinds on the economy’s potential. Structural impediments, particularly deteriorating competitiveness in the exports and manufacturing sectors, as well as global capacity limit the benefits of the global economic recovery on the Thai economy.
Headline inflation is projected at 0.6% and 1.3% and core inflation at 0.6% and 0.9% in 2024 and 2025, respectively. The downward revision is attributed to a decline in prices of certain raw food items due to oversupply and a decrease in energy prices due to an extension of government subsidies, while the recent negative inflation readings excluding subsidies remained positive. Overall, inflation is anticipated to return to target by the end of this year. In the period ahead, the effect of geopolitical tensions and government subsidies on energy prices should be monitored.
The BOT said overall financial conditions remain stable, while the costs of private sector funding via commercial banks and corporate bond markets remain approximately unchanged. Total outstanding loans of businesses and households are expanding at a slower pace due to debt repayments. Nevertheless, the amount of new loans granted is still growing, indicating overall normal credit functioning.
However, it warned that some groups of SMEs and low-income households face tighter credit conditions due to difficulties in financial access and deterioration of debt serviceability deterioration owing to a slower rebound in income. This is consistent with the outstanding amount of non-performing loans (NPLs) which is expected to gradually pick up, and the likelihood of a surge in non-performing loans is limited.
The BOT said the MPC expressed concern about elevated household debt and recognised the importance of debt deleveraging, which will help mitigate vulnerabilities in the macro and financial system in the long term. Moreover, the committee assessed that the effectiveness of monetary policy on resolving financial access issues is limited and welcomed the central bank’s initiatives to accelerate targeted measures, particularly measures for responsible lending.
The baht’s volatility when measured against the US dollar increased and depreciated more relative to other regional currencies due to the Federal Reserve’s monetary policy outlook and domestic economic and financial developments. Therefore, the committee said, it will continue to closely monitor the volatilities in the foreign exchange market.
The BOT underscored that the prevailing monetary policy framework seeks to maintain price stability, support sustainable growth, and preserve financial stability. Most committee members believe the policy rate remains consistent with sustaining growth while fostering macro-financial stability in the longer term.
Nevertheless, uncertainties about the Thai economy remain high, particularly from export recovery, government budget disbursement, and fiscal stimulus measures. Hence, the MPC said, it will closely monitor these developments and take into account growth inflation outlooks in deliberating monetary policy going forward.
