Analysts suggest that the Bank of Thailand, which has historically resisted interest rate cuts amid significant political pressure, may be forced to initiate the most aggressive easing cycle in the region due to a deteriorating economy.
According to Nomura Holdings, the central bank might need to implement rate cuts of up to 100 basis points over the next year, while Bank of America forecasts a reduction of 75 basis points by 2026. Either scenario would be the largest among Southeast Asian central banks.
“Thailand is lagging in its post-pandemic recovery and is also highly susceptible to the rise of global trade protectionism,” remarked Nomura economist Charnon Boonnuch. “We believe the Bank of Thailand is increasingly worried about the economic growth outlook and is becoming less resistant to additional rate cuts.”
This urgency emerges as Southeast Asia’s second-largest economy faces mounting challenges, exacerbated by the escalating trade war initiated by Donald Trump and a slowdown in tourism. Long-standing issues such as a struggling manufacturing sector, rising household debt, and weak consumer spending have contributed to growth averaging below 2% over the past decade.
Most analysts anticipate the next interest rate cut in June, although some foresee a higher likelihood that the Bank of Thailand might act as soon as next month. The central bank has already shifted from its previously hawkish stance with unexpected rate cuts in October and February but has been cautious about committing to a comprehensive easing cycle.
Traders have factored in this dovish outlook, with baht swaps indicating an additional 10 basis points of easing anticipated over the next 12 months since the surprise cut on February 26. This month, the baht has performed well and is among the top currencies in Asia.
However, the February meeting minutes reflected increased concerns, with policymakers stating, “the balance of risks for monetary policy has shifted towards the economic outlook.”
“The minutes convey a distinctly dovish tone,” commented Barclays economist Shreya Sodhani. “Growth will now take precedence.”
Impact of Trade Wars
The US tariffs are likely to hinder Thailand’s export sector and may lead to an influx of cheaper goods from China at a time when local manufacturers are struggling to remain competitive. The central bank estimates that the trade war could reduce GDP growth, which is projected to be just above 2.5% this year, by as much as half a percentage point.
Domestically, the residual effects of the pandemic are still evident. Households and small businesses are grappling with unmanageable debt, compelling them to deplete their savings as banks are reluctant to provide further loans.
“Government cash handouts have had minimal effect on economic activity and consumer spending,” said BofA’s Kai Wei Ang, who revised his Thai GDP growth forecast down to 2.3% from 2.6%. “Demand for durable goods, especially in the automotive and real estate sectors, remains weak due to stringent lending conditions.”
The Thai government and central bank have proposed new measures to combat the economic malaise. Recently, the Bank of Thailand announced relaxed mortgage regulations, while the Finance Ministry aims to address non-performing consumer loans and credit card debts.
Nevertheless, there is a growing consensus that a rate cut — ideally down to 1% — would have a broader positive impact. After being cautious for so long, signs indicate that it may now be time for the Bank of Thailand to intervene. With several rounds of cash aid already dispersed, the government has limited fiscal capacity to further stimulate the economy, as current public debt stands at 64% of GDP, nearing the 70% threshold.
“The policies implemented so far have mainly focused on boosting consumer spending without effectively addressing the structural constraints hindering Thai growth,” noted Lavanya Venkateswaran, an economist at Oversea-Chinese Banking.
“Additional rate cuts from the Bank of Thailand could provide marginal benefits, particularly if financial conditions are deemed to be tightening.”
