Thailand may yet embark on region’s most aggressive rate cuts

Asean Business

Trade War Fallout

The Bank of Thailand (BOT) may need 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’s Economic Dilemma

Thailand is not only the laggard in the post-pandemic recovery, it is also among the most vulnerable to increased global trade protectionism, said Nomura economist Charnon Boonnuch. "We think the BOT is increasingly concerned about the weakening growth outlook and is no longer pushing back strongly against more rate cuts."

Trade War Impact

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.

Domestic Challenges

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."

Government Initiatives

The Thai government and central bank have 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.

Conclusion

The urgency comes as South-east Asia’s second-largest economy faces even greater headwinds. The Bank of Thailand may need to embark on the region’s most aggressive easing cycle as a sluggish economy takes a turn for the worse. The central bank may need to deliver as much as 100 basis points in rate cuts over the next year. Further rate cuts from the BOT could help at the margin, particularly if financial conditions are assessed as tightening.

FAQs

Q: What is the forecast for the Thai economy?
A: 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.

Q: What is the Bank of Thailand’s stance on rate cuts?
A: The Bank of Thailand 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.

Q: What are the challenges facing the Thai economy?
A: The Thai economy is facing challenges such as a sluggish manufacturing sector, mounting household debt, and sluggish consumption.

Q: What are the government’s plans to address the economic downturn?
A: The government and central bank have drafted new measures to address the malaise, including relaxing mortgage rules and tackling non-performing consumer and credit card loans.