Thailand’s central bank is expected to maintain its policy rate at a decade-high level this week, as the economy picks up momentum. However, uncertainties surrounding a 145 billion baht cash handout could create renewed pressure for rate cuts.
Paetongtarn Shinawatra, the new Prime Minister and the third member of the Shinawatra family to govern Thailand, has vowed to steer the nation away from an “economic crisis,” although she mentioned that further study is needed on the key stimulus proposed by her predecessor.
Similar to the deposed premier Srettha Thavisin, she may encourage the Bank of Thailand (BoT) to lower borrowing costs. Although Ms. Paetongtarn has not publicly addressed the BoT since her parliamentary victory on Friday, she previously criticized the bank in May for resisting Mr. Srettha’s calls for a rate cut, labeling the central bank’s independence as an “obstacle” to economic recovery.
“The pressure on the central bank is likely to persist as long as the economy remains weak,” stated Somprawin Manprasert, chief economist at Siam Commercial Bank. “The government will likely continue to advocate for coordination between fiscal and monetary policies, as well as policy accommodation.”
According to a Bloomberg News survey, the BoT is expected to keep its benchmark rate unchanged for the fifth consecutive meeting on Wednesday, with only one out of 24 economists forecasting a quarter-point cut to 2.25%.
Southeast Asia’s second-largest economy expanded by 2.3% in the second quarter compared to the previous year, marking its fastest growth in five quarters. However, this may not alleviate the pressure on the BoT to consider cuts, according to Tamara Henderson of Bloomberg Economics.
“Underlying trends show that domestic demand is slowing. Additionally, the new Prime Minister seems to share a tendency for central bank interference,” Ms. Henderson wrote in a note dated August 19.
With Ms. Paetongtarn questioning the cash stimulus, any resurgence of tensions between the government and the central bank could heighten uncertainties in financial markets that are still adjusting to recent political changes. Market volatility was heightened during the standoff between Mr. Srettha and the BoT, where central bankers resisted not only rate cuts but also rejected the proposed cash handout.
The legacy of past Shinawatra administrations includes conflicts with the central bank. Ms. Paetongtarn’s father Thaksin and her aunt Yingluck both employed populist strategies to achieve higher economic growth, exerting pressure on the bank in the process.
In 2001, Thaksin dismissed the central bank governor after he resisted rate hikes, while Yingluck’s government had previously campaigned for lower rates during her term.
Ms. Paetongtarn is taking charge of an economy that has struggled to keep pace with its regional neighbors over the past decade, hindered by significant household debt and a sluggish recovery for businesses post-pandemic. Thailand last achieved annual economic growth above 5% during Yingluck’s administration, prior to nearly a decade of military-backed governance. The economic challenges will be tough for Ms. Paetongtarn, particularly as certain sectors, such as manufacturing, have been affected by an influx of low-cost imports, mainly from China.
The new Prime Minister’s stance on the central bank’s independence will be closely scrutinized, particularly given her father’s ongoing influence. Even before her official leadership declaration, local media reported that Thaksin advised his daughter to abandon the cash handout to avoid any negative legal implications.
“If the digital wallet initiative is scrapped without an alternative economic stimulus, this could pose risks to growth forecasts and increase the likelihood of an earlier rate cut,” warned Krystal Tan, an economist with Australia & New Zealand Banking Group.
The newly formed government might also aim to tighten its grip on the central bank by appointing its nominee for the next chairman when the current term expires next month. Although the BoT chair does not have direct influence over monetary policy, this individual can assess the governor’s performance and influence the Monetary Policy Committee’s composition.
During Mr. Srettha’s 11 months in office, his aides, including Finance Minister Pichai Chunhavajira, sought to revise the BoT’s inflation target of 1% to 3% upwards, which analysts viewed as a strategy to encourage rate cuts.
“It appears that tensions between the government and the central bank will continue until the latter starts to gradually normalize its policy,” noted Miguel Chanco, an economist at Pantheon Macroeconomics Ltd, who anticipates a rate cut on Wednesday. “These tensions may ease if the new Prime Minister decides to abandon the controversial digital wallet initiative.”
