Debt storm warning as economy faces slowdown

Following its meeting on August 13, 2025, the Monetary Policy Committee (MPC) cut the policy interest rate by 0.25%, marking the fourth reduction since last year. The rate now stands at 1.50%, the lowest in more than two years.

One reason for the cut was to support an economy expected to slow in the second half of 2025, particularly affecting vulnerable groups such as SMEs and low-income households. These groups have been further impacted by existing structural problems, domestic tax measures, and the effects of former US president Donald Trump’s tariff policies, which have reduced Thailand’s competitiveness.

MPC secretary Sakkapop Panyanukul told Krungthep Turakij’s “Deep Talk” programme that the rationale for lowering the rate to 1.50% was different from the previous cut in June.

He explained that monetary policy typically focuses on three main factors: the economy, inflation, and financial conditions. While economic and inflationary conditions had not changed significantly from the previous review, financial conditions had become a greater priority. 

These conditions have continued to tighten, especially in terms of the exchange rate and the slowdown in lending, which has particularly affected SMEs and low-income households.

Overall credit growth has decelerated, but the MPC’s main concern lies with SME lending. Large corporations have not faced significant issues, with lower borrowing demand and increased debt repayments. 

By contrast, SMEs, which require financing, are receiving fewer loans, partly due to higher credit costs. NPLs in the SME and high-risk retail segments have also increased, prompting banks to become more cautious. 

Lending to these segments has declined for six to seven consecutive quarters — a trend the MPC is watching closely.

The Bank of Thailand (BOT) has warned that if bad debts rise further and banks become overly cautious, effectively “closing the umbrella”, normal credit flows could be disrupted. Preparations are being made to manage a potential increase in NPLs, including the possible establishment of asset management companies (AMCs) to handle distressed debt more effectively.

Interest rates not a cure-all

The BOT has acknowledged that rates could fall further from the previous record low of 0.50%, but said there are growing constraints on further cuts. Interest rates, it noted, cannot address structural problems, and are not among the top obstacles faced by businesses, which are more often linked to competitiveness. Every policy carries costs and side effects, particularly over the long term if rates are kept lower than appropriate.

The BOT also said that once interest rates drop below 2%, the effectiveness of monetary policy begins to diminish, a trend seen globally. This makes the balance between timing and the effectiveness of policy increasingly important.

For new borrowing or access to fresh credit, rate cuts do not provide a direct solution. Loan accessibility depends primarily on borrowers’ competitiveness and credit risk. Targeted measures, such as credit guarantees, lowering business costs, fostering competition, and improving lenders’ access to borrower data, are more effective in addressing the problem.

“Interest rates are not a magic bullet to solve every issue, but they can complement the broader macroeconomic picture,” the BOT said. “This rate cut was a calculated decision, weighing costs and benefits, to further ease financial conditions and help borrowers with limited access to credit better adapt.”

BOT has other tools to support the economy

Beyond interest rate adjustments, the BOT also has other instruments at its disposal, such as macroprudential measures targeted at specific sectors. For example, in April, it eased the loan-to-value (LTV) ratio for buyers of second and subsequent homes to help reduce unsold housing inventory, though the measure was not aimed at directly stimulating the market.

In terms of liquidity support, the BOT said that large-scale asset purchases (QE) and low-interest soft loans have similar outcomes in practice. However, implementing QE or soft loans using the BOT’s own funds would require enabling legislation.

“Access to low-interest loans or QE is not the primary solution for improving credit access,” the BOT noted. “As long as businesses remain high-risk, injecting funds alone will not lead to lending. Structural economic reforms and tackling the root cause — credit risk — are more targeted and effective policies.”

MPC concerned over baht’s strength leading the region

On the exchange rate front, the baht has strengthened compared with the beginning of the year, partly due to the weakening of the US dollar. What is more concerning, however, is that at certain points the baht has led the region in appreciation. Even though Thailand’s tariffs are broadly in line with other countries in the region, the baht’s relative strength has increased pressure on businesses already facing adjustments from new tax measures.

The MPC has long viewed tighter financial conditions and the baht’s appreciation as issues, but the BOT had been monitoring developments in the hope that the situation would ease. Instead, conditions have remained tight, and the central bank now expects the economy to slow in the second half of the year.

As a result, the greater emphasis on financial conditions is intended to ensure they do not become an additional obstacle to economic adjustment. The latest rate cut aims to ease already tight financial conditions further, providing relief to sectors less able to adapt and reducing the debt burden on vulnerable groups.

BOT acknowledges concentrated, lower-quality growth

The BOT says the Thai economy is now experiencing “concentrated growth with declining quality.” In the first half of the year, GDP is expected to grow by around 3%, better than previously forecast and close to the country’s potential. However, growth in the second half is expected to be flat quarter-on-quarter, with a significant risk of slowdown.

The BOT is particularly concerned about structural problems that have persisted for two to three years and have been exacerbated by the recent shock from tax measures. Sectors of concern include manufacturing, exports, tourism, and especially real estate, which has been sluggish for some time. While interest rate cuts can help ease debt burdens and make borrowing decisions easier, the BoT said they are not the primary driver of recovery for these sectors.

Six banks cut interest rates by 0.25%

Kanjana Chokpaisalsilp, an executive at Kasikorn Research Centre, said the across-the-board rate cuts by commercial banks, covering all customer segments, mark a historic first for the economy. All three main lending rates were reduced by 0.25%: the MLR for large corporate borrowers, the MOR for large corporate overdrafts, and the MRR for retail borrowers.

“This is the first time in history that all three rates have been reduced by the same margin of 0.25%,” Kanjana said. “In the past, only two out of the three rates were typically cut by similar amounts. This time, the uniform reduction is particularly positive, as it helps to consistently reduce debt burdens across all borrower groups.”