BOT likely to cut interest rate in the fourth quarter: SCB EIC

The Bank of Thailand (BOT) will begin lowering interest rates in the fourth quarter of  2024 and again in Q1 of 2025 to ease domestic financial conditions after a period of financial tightness, according to SCB Economic Intelligence Center (SCB EIC).

The Monetary Policy Committee of the BOT earlier this week decided to maintain the policy interest rate at 2.50%. However, SCB EIC sees a more dovish stance in the central bank's communication.

Following a period of significant financial tightness, combined with existing financial vulnerabilities among businesses and households, domestic economic momentum in Thailand is expected to weaken noticeably by the end of this year. 

Additionally, Thailand's economy in the coming year will face uncertainties regarding both domestic and international economic policies, making it necessary for Thai monetary policy to play a more supportive role in economic momentum.

SCB EIC believes that short-term economic developments in Thailand are in line with the BOT's forecasts, as reflected in Q2 GDP growth figures close to market expectations. However, a closer look at the growth components reveals signs of a slowdown in domestic demand, indicating that future domestic demand may not support the economy as it has in the past. 

While general inflation remains below target, core inflation, excluding energy and fresh food prices, remains persistently low, reflecting weak domestic demand. SCB EIC believes this slowdown in domestic demand may prevent Thailand’s economy in 2025 from growing less than previously estimated.

Overall, Thai financial conditions are tight, as evidenced by the real policy interest rate rising more quickly than in the past. Households, in particular, may face tighter financial conditions due to stricter lending standards from financial institutions, especially commercial banks, SCB EIC said.  

This has significantly reduced households' ability to accumulate debt compared to the past. Therefore, starting to lower interest rates in such conditions is unlikely to stimulate excessive borrowing and does not hinder the debt deleveraging process. 

Additionally, the end-of-year economic environment will be a suitable time to lower interest rates, given that global financial conditions are expected to ease according to the US Federal Reserve’s monetary policy direction, SCB EIC said. 

Furthermore, Thailand’s economy will face uncertainties from US trade policies post-election and increased uncertainty in Thai economic policies next year.

SCB EIC estimates that the BOT will reduce the policy interest rate once to 2.25% by the end of this year and to 2% in Q1 2025.