According to KGI Securities (Thailand), the US economy is anticipated to experience a cyclical slowdown beginning in late 2024 and extending into 2025, prompting the Bank of Thailand (BoT) to potentially reduce its policy rate by up to 1.5 percentage points next year.
This cyclical slowdown is expected to normalize the labor market and heighten the effects of high interest rates on US consumers, as reported by KGI in a document co-authored by market strategist Rakpong Chaisuparakul and economist Pragrom Pathomboorn.
With US inflation on the decline, there is an opportunity for the Federal Reserve to implement more aggressive interest rate cuts to support the economy.
“We believe the risk of recession remains low, and the upcoming interest rate cuts should facilitate a transition toward more normalized growth in the US,” the report stated.
The US labor market has shown significant deceleration, albeit at an early stage, which may adversely affect other economic activities. To avert unfavorable economic circumstances, the report emphasizes the necessity of rate cuts to prevent a recession, noting that “higher rate cuts are essential in the initial phase” to bring rates closer to normal levels.
The report indicates that the federal funds rate (FFR) is currently at its cycle peak and is expected to begin a downward trend from September 2024 through June of the following year. It estimates that the Fed could lower the rate by a total of two percentage points during this cycle, decreasing the FFR from the current range of 5.25-5.50% to 3.25-3.50% by 2025.
Locally, the BoT’s Monetary Policy Committee is likely to maintain the current rate through 2024 before adjusting its overly tight stance by cutting the policy rate by a total of one percentage point to 1.50% in 2025 in order to alleviate pressure on Thai consumers and borrowers.
KGI’s analysis on the effects of cutting Thai interest rates by 0.25 to 1 percentage point revealed that the utilities, ICT, and finance sectors would benefit considerably from lower rates.
However, the report cautions that for the finance sector, share prices may not respond favorably to a declining interest rate in the short term, as investors remain wary of asset quality and confidence in the Thai debenture market. It also notes that while Thai interest rate cuts in 2025 might negatively impact the net margins of major banks, the actual effect could be somewhat mitigated by a potential improvement in Thai GDP growth as interest rates decrease.
In a separate report, financial analyst Chalie Kueyen indicated that if the BoT cuts the policy rate by 1 percentage point within a year, it could negatively affect the operations of all banks and result in a 20-30% drop in earnings in the worst-case scenario. He stated that banks would need to reduce expenses or credit costs in response to such rate cuts.
