Key Points
- As widely expected, the Bank of Thailand (BoT)’s Committee has kept the benchmark policy rate at a decade-high of 2.50% - a level that it deems to be broadly neutral - for the second straight meeting in February (Chart 1). The central bank cited that the current level of interest rate is “consistent with preserving macro-financial stability, a key foundation for sustainable growth”.
- However, the policy decision was not unanimous (unlike during the November 2023 meeting), with two members voting for a 25bp rate cut, amid mounting pressures from the government for a lower policy rate. Before the recent two policy meetings, the BoT was on a rate tightening cycle, with 200bps of rate hikes being delivered since 2022. This pace of tightening was, however, subdued relative to the US Fed’s 525bp of rate hikes.
- There are significant changes to the BoT’s growth assessment from its November’s outlook, with policymakers lowering their outlook for Thailand’s GDP growth to 2.5%-3% this year, from 3.2% previously. The downgrade has been driven by waning growth momentum in Q4 2023, structural challenges from weakening competitiveness and lower tourism spending per person relative to the pre-pandemic period, and a still cautious outlook for external demand.
- High frequency data shows Thailand's economic recovery is slowing. Private consumption slowed to +0.1% mom sa in December from +0.7% in November, private investment fell 2.3% mom sa, from +1.6% in November, while value-added production fell 1% mom sa, extending the 1.9% decline in November. The manufacturing PMI was 46.7 in January, up from 45.1 in December, but still in contractionary territory (<50).
- We still don’t expect the BoT to front-run the US Fed in cutting interest rates, given the risk of capital outflows. Our base case is for the BoT to stand pat at 2.50% this year. However, a combination of rising dovish bets for the BoT and the US Fed dismissing early rate cuts will continue to exert downward pressure on the THB versus US dollar. Baht swaps are pricing for 50bp rate cut in the next twelve months (Chart 2).
- That said, odds of interest rate cuts have increased given a backdrop of a softer outlook for growth and muted inflation. Headline inflation have printed negative since October 2023, dragged down by falling prices of food and energy, leading to a real interest rate (adjusted for inflation) that’s among the highest among regional peers. The latest January CPI print was -1.1%yoy, while core inflation remained muted at just 0.5%yoy. And while the financial system remains resilient, there are pockets of vulnerability emerging among low-rated corporate bond issues and highly indebted households amid a slow recovery in household income. In the policy statement, the central bank said that it has accelerated debt restructuring for vulnerable groups.
