Thailand Cuts Key Interest Rate Amid Economic Struggles

By Orathai Sriring

BANGKOK (Reuters) – After months of political pressure and public disagreements, Thailand's central bank on Wednesday delivered what the government sought: a cut in the key interest rate, marking the first reduction since 2020.

Now, the challenge falls to Prime Minister Paetongtarn Shinawatra, a new leader whose Pheu Thai party has struggled to invigorate the economy since taking office last year, banking on a major cash handout program.

With the BOT no longer a scapegoat, it's now up to Paetongtarn's government to show results, despite facing formidable odds. "Of course, this time there are no excuses. The government must continue to stimulate the economy fully," said analyst Natapon Khamthakrue at Yuanta Securities.

Massive household debt, weak consumer spending, and declining industrial sentiment weigh heavily on Southeast Asia's second-largest economy, which grew just 2.3% year-on-year in the second quarter. Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, warned that the economic slowdown isn’t over, predicting GDP growth to fall to 2% next year.

The Bank of Thailand (BOT) also revised its 2025 GDP growth estimate downward to 2.9%, despite a slight improvement to 2.7% for 2023, still lagging behind other Asian nations.

The central bank specified that the recent 25-basis-point rate cut isn’t the beginning of an easing cycle, but rather a "recalibration" not influenced by political pressures.

Critical sectors, including the automobile industry, are struggling, and the country is grappling with factory closures affecting its manufacturing sector. The industrial sentiment index plummeted to a 27-month low in September due to stagnant domestic demand, adverse floods in the north, and a robust baht.

"Thailand has experienced the slowest recovery of any country in the region from the pandemic," stated Gareth Leather, Senior Asia Economist at Capital Economics, predicting another rate cut in December. He noted that GDP is only just above pre-crisis levels, with subdued growth amid declining global demand and slower tourism recovery.

Inflation and Friction

Thailand’s youngest premier, Paetongtarn, age 38, assumed office in August after the unexpected ousting of her predecessor, Srettha Thavisin. She warned parliament last month that without financial measures to spur growth, the economy would not exceed a 3% growth rate annually.

In late September, the government initiated the first phase of a $14 billion stimulus package, aiming to distribute 10,000 baht ($300) each to about 45 million citizens. "The pressure is now on Paetongtarn to ensure the digital wallet handout remains robust, as other significant interventions may require time to materialize," commented Ben Kiatkwankul of Maverick Consulting Group.

Following the BOT’s unexpected rate cut, Finance Minister Pichai Chunhavajira stated it would boost liquidity and consumer confidence, while advocating for a higher inflation target to elevate consumer prices. The BOT is currently determining an inflation target for 2025, with the government looking to reassess the 1-3% range established in 2020.

Annual headline inflation was only 0.61% in September, highlighting weak demand. “We want to see inflation higher than now,” Pichai said, emphasizing that a higher target would be beneficial.

In addition, there are tensions surrounding the appointment of a chairman for the BOT board, with the government nominating a party loyalist and critic of the central bank governor to strengthen its influence on the institution. This chairperson will have a say in the Monetary Policy Committee's composition, which shapes interest rate decisions. Sethaput's term ends next September.

($1 = 33.23 baht)