Photo Credit: SCB
Siam Commercial Bank (SCB) predicts that the Monetary Policy Committee (MPC) will cut the policy rate to 1% during the first half of 2026, primarily to support inflation and prevent debt deflation rather than to stimulate economic growth.
Yunyong Thaicharoen, SCB’s Chief Economist and Sustainability Officer, explained that tightening financial conditions—driven by reduced lending to households and small businesses, coupled with the appreciation of the Thai baht—prompt this forecast. SCB believes the MPC will lower the rate to 1% in the first half of 2026 to bolster an economy with sluggish growth prospects.
This rate reduction aims to lower financial costs, ease upward pressure on the baht, boost headline inflation (which is expected to stay below the target range), and mitigate the risk of debt deflation—a situation where debt burdens increase as income drops during economic slowdowns.
Last Wednesday, the MPC unanimously decided to cut the policy rate by 25 basis points to 1.25%, effective immediately, in a bid to support economic momentum. Throughout 2023, the MPC has reduced the rate four times over six meetings, lowering it by a total of 1 percentage point, with cuts in February, April, August, and December. The rate was held steady at the June and October meetings.
Despite these cuts, household debt remains high, estimated at about 85% of GDP, which is considered elevated even among emerging markets. Inflation is projected to contract slightly by 0.1% this year but is expected to grow modestly to around 0.2% in 2026—still below the Bank of Thailand’s 1-3% target range.
When inflation is very low or negative, fixed-interest debt becomes more burdensome, discouraging spending and borrowing among households. This, coupled with household deleveraging, leads to cautiousness in consumer spending and reluctance from businesses to expand production. Additionally, imported goods and price competition are squeezing profit margins, further contributing to deflationary pressures—a scenario where prices decline, weighing heavily on households and businesses.
Yunyong highlighted the importance of close monitoring, noting that while inflation isn’t yet broadly negative, some product categories are experiencing sharp declines driven by supply-side factors. Core inflation is currently below 1%.
Private consumption growth has slowed recently and is expected to continue decreasing in 2026, partly due to declining household incomes. Data from the National Statistical Office shows average income for workers dropped from 29,502 baht per month in the first half of 2023 to 28,151 baht in the first half of 2025. Although real income, including bonuses and overtime, has gradually recovered during the first nine months of 2025, it remains below pre-COVID levels.
The SCB EIC Consumer Survey 2025 found that 60% of low-income earners (less than 30,000 baht/month) face income shortfalls, especially those earning less than 15,000 baht. Similarly, about half of middle-income earners (30,000-50,000 baht/month) experience income gaps, while 31% of high-income earners (over 50,000 baht/month) report that their income insufficiently covers expenses.
This widespread income shortfall is a significant factor behind persistently high debt levels among low- to middle-income households, and this issue increasingly affects higher-income groups, Yunyong concluded.