[BANGKOK, JAKARTA] The Bank of Thailand (BOT), which has long resisted interest-rate cuts despite immense political pressure, may end up having to embark on the region’s most aggressive easing cycle as a sluggish economy takes a turn for the worse, according to analysts.
The central bank may need to deliver as much as 100 basis points in rate cuts over the next year, according to Nomura Holdings. Bank of America NA predicts a 75 basis point reduction by 2026. Either prediction would be the most among South-east Asian central banks.
“Thailand is not only the laggard in the post-pandemic recovery, it is also among the most vulnerable to increased global trade protectionism,” Nomura economist Charnon Boonnuch said. “We think the BOT is increasingly concerned about the weakening growth outlook and is no longer pushing back strongly against more rate cuts.”
The urgency comes as South-east Asia’s second-largest economy faces even greater headwinds as Donald Trump’s trade war escalates and the tourism boom fades. That adds to longstanding problems – an ailing manufacturing sector, mounting household debt and sluggish consumption – that have kept growth averaging below 2 per cent over the last decade.
Most analysts expect the next rate cut in June, though some are pencilling in a bigger chance that the BOT may take action as soon as next month. Though the central bank has already shifted from its hawkish stance with surprise rate cuts in October and last month, it’s been hesitant to commit to a full-blown easing cycle yet.
Traders have priced in the dovish outlook, with baht swaps factoring an additional 10 basis points of easing over the 12-month horizon since the Feb 26 surprise cut. The baht is among the best-performing currencies in Asia this month.
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Still, its tone carried significantly more concerns, according to the February meeting minutes, with policymakers saying “the balance of risks for monetary policy had shifted towards the economic outlook”.
“The minutes strike a clear dovish tone,” said Barclays economist Shreya Sodhani. “Growth will now be in the driver’s seat.”
Trade war fallout
The US tariffs will not only dampen Thailand’s exports sector, they could also divert more of China’s cheaper goods into the country at a time when local manufacturing has struggled to compete. The central bank estimates that the trade war could dock as much as half a percentage point from gross domestic product growth of slightly above 2.5 per cent this year.
On the domestic front, scars from the pandemic remain. Households as well as micro and small enterprises are saddled with debt they cannot pay back, forcing them to dip into savings as banks balk at extending more loans.
“Government cash handouts have had limited impact on economic activities and consumer spending,” said BofA’s Kai Wei Ang, who downgraded his Thai GDP growth forecast to 2.3 per cent from 2.6 per cent. “Durable goods consumption, particularly in the auto and real estate sectors, remains weak due to tight lending conditions.”
To be sure, the Thai government and central bank has drafted new measures to address the malaise. The BOT announced on Thursday (Mar 20) that it would relax mortgage rules. The finance ministry also plans to tackle billions of US dollars of non-performing consumer and credit card loans.
However, the government argues a rate cut – ideally to as low as 1 per cent – would have a much broader impact. And there’s a growing sense that the time has come for the BOT to step in after fighting to keep its powder dry for so long. After several tranches of cash aid, the government has limited fiscal space to help stimulate the economy with the current public debt now at 64 per cent of GDP, nearing the 70 per cent limit.
“The policies introduced so far have mainly focused on boosting consumption expenditures, without necessarily addressing the structural constraints that have been a drag on Thai growth,” said OCBC economist Lavanya Venkateswaran.
“Further rate cuts from the BOT could help at the margin, particularly if financial conditions are assessed as tightening.” BLOOMBERG
