MPC cuts interest rate to 1.25%, tightens control over baht as Thai economy struggles

The Monetary Policy Committee (MPC) on Wednesday reduced the policy interest rate by 0.25% to 1.25%, as it anticipates continued economic slowdown in Thailand next year.

MPC Secretary-General Sakkapop Panyanukul explained that the committee believes monetary policy can be further relaxed given the clear signs of an economic slowdown and the increased risks facing the country. This policy move is intended to support economic recovery and reduce the debt burden on vulnerable groups, as well as enhance the effectiveness of fiscal measures and other government policies.

The decision to lower the interest rate by 0.25% was unanimous, with the policy rate now at its lowest in three years. The committee highlighted that the Thai economy is currently expanding below its potential, with vulnerabilities from both domestic structural issues and external factors exacerbating the situation. Particularly in the latter half of the previous year, economic conditions worsened more than anticipated due to several temporary factors, weakening growth prospects for the coming years.

Economic pressures in the second half of the year stemmed from specific events, including factory closures and disruptions in the beverage production sector, which directly impacted manufacturing. Additionally, severe flooding in southern Thailand caused widespread damage to both lives and property. The impact of the floods is expected to last into the first quarter of the next year, with economic activities in affected areas continuing to be hampered, further slowing down the overall economy.

Looking ahead, the MPC projects that Thailand's economy will grow more slowly in 2026 and 2027, with key drivers of growth weakening across various sectors. Private consumption is expected to slow, tourism will recover gradually, and exports are predicted to see a significant decline, growing at just 0.6%—far below the 12% growth expected this year. The effects of tariffs are expected to gradually exert downward pressure on Thailand's competitiveness, weakening export momentum.

"The GDP growth forecasts of 1.5% and 2.3% for 2026-2027 are significantly below the potential growth rate of 2.7–2.8%," said Sakkapop. The MPC has also incorporated the assumption that government budgets will be delayed by 2-3 months, which will impact GDP, particularly during the 2027 budget year. Additionally, political measures such as debt suspension or forgiveness have not been considered in this forecast due to the need for more clarity on the details.

Sakkapop acknowledged that, given the economic slowdown and rising risks, the MPC sees the potential for further monetary easing. The current policy rate of 1.25% is considered low, and the real interest rate is now negative at -0.33%. The rate cut aims to reduce the burden of interest payments on floating-rate loans and help lower the cost of new loans. However, past experiences have shown that such measures benefit large businesses more than small and medium enterprises (SMEs), suggesting that interest rate cuts alone cannot address structural issues in the economy.

MPC orders enhanced monitoring of strengthening baht

The baht has recently strengthened quite rapidly, appreciating about 8% since the beginning of the year against the US dollar. This is partly due to the weakening of the dollar following interest rate cuts by the US Federal Reserve, and partly due to the rise in gold prices, which has contributed to increased volatility.

In addition, the strengthening of the baht has been exacerbated by the sharp rise in gold prices, which has further amplified the currency's fluctuations at certain times.

From the MPC's perspective, it is important to closely monitor and manage capital inflows, especially from the outset. In its latest statement, the committee has heightened its communication regarding the management of the baht's value, indicating that exchange rates are a key factor considered when setting monetary policy direction. The Bank of Thailand (BOT) has already been managing the currency market, and this monitoring has been intensified beyond usual levels.

Regarding abnormal transactions, the BOT has identified irregularities in transactions involving gold, especially during periods when the proportion of foreign exchange trading linked to gold was higher than usual.

This is where the BOT has begun to closely investigate and request additional information from the relevant parties. Such information will help clarify the approach to managing baht volatility, both in terms of the scope and the appropriate tools to address the fluctuations. A clear pattern has emerged in financial flows related to gold at certain times, with unusually high volumes compared to normal transactions.

Furthermore, the BOT is working to monitor other types of transactions alongside this, coordinating with commercial banks to tighten scrutiny and distinguish between normal and abnormal transactions that have a significant impact on the baht.

Concerns over SME loans and rising non-performing loans

One of the key issues discussed by the MPC is the ongoing struggles of SMEs, which have not yet recovered and remain a structural problem in the aftermath of the COVID-19 pandemic. As a result, SME revenues have clearly grown at a slower pace amid increasing competition. Although SMEs have a need for credit, access remains limited due to high credit risks, causing financial institutions to exercise caution. This has led to a continuous contraction of SME lending for nearly three years, and there has been no clear sign of improvement in the quality of SME loans (NPLs).

The slow recovery of SMEs is also affecting labour income, as SMEs employ about two-thirds of the workforce. This has resulted in slower income recovery in the manufacturing sector compared to the services sector, further pressuring overall purchasing power.

The BOT is therefore collaborating with other agencies to develop additional mechanisms or tools to guarantee loans, reduce credit risks, and enable more capable SMEs to access financing. These additional measures, which are currently being developed, will be more accessible and less restrictive than previous ones, complementing existing measures such as debt restructuring.

Despite low inflation, which is expected to remain at -0.1% this year, 0.3% next year, and 1.0% in 2027, the BOT recognises that purchasing power is not in a strong position. This is due to the already high living costs, which continue to put pressure on consumption if income does not grow sufficiently.

Therefore, the committee has revised its inflation forecast downward, with energy price declines being the main factor. Core inflation is expected to remain stable at 0.8% this year and next year.

"However, with low inflation, the BOT sees a relatively low risk of deflation, as there are currently no clear signs such as widespread price reductions or changes in consumer purchasing behaviour," said Sakkapop.

Unanimous decision reflects use of monetary policy

Amornthep Chawla, head of research at CIMB Thai Bank (CIMBT), stated that the unanimous decision by the MPC might signal to the market that financial tools are ready to drive the economy in the near future, addressing concerns about the strengthening baht and the contraction of SME loans.

Given that the dissolution of parliament has limited the effectiveness of fiscal policy, the MPC's decision to cut interest rates may indicate that monetary policy is prepared to play a central role in supporting economic growth, which may be slow.

However, in the first half of 2026, economic growth is expected to remain low, with a recovery beginning in the second half. If the economy slows more than the market anticipates, an accommodative monetary policy could play an important role in sustaining the economy. If further interest rate cuts are considered, they would likely aim to reduce the burden on those already in debt, rather than stimulating loan demand.

"Currently, there is no immediate need to reduce interest rates to 1% since the economy is still within the expected range," he added.

FTI says rate cut helps small businesses

Kriengkrai Thiennukul, chairman of the Federation of Thai Industries (FTI), said that the interest rate cut would provide benefits in various areas, particularly for businesses:

1. Direct reduction in financial costs for businesses (especially SMEs): The most obvious benefit is the reduction in financial costs, particularly for SMEs, as interest payments will decrease, easing the burden on borrowers.
2. Psychological impact leading to a weaker baht: This is crucial, as the baht had appreciated by over 8.1%, while regional competitors like Vietnam saw their currencies weaken by around 3-3%. The interest rate cut is seen as a mechanism to help ease the strengthening of the baht. Additionally, the 0.25% rate cut aligns with the US Federal Reserve's forecast for a similar reduction, which also impacts market psychology.
3. Clear economic stimulus signal: The decision reflects the government's intention to stimulate the economy. The private sector expects this measure to have short-term benefits, as the economy still faces multiple negative factors, such as flooding in nine southern provinces and the impact of border clashes with Cambodia. These issues have disrupted various sectors, including agriculture, schools, hospitals, and industrial estates, as well as tourism during the high season at the end of the year.

While the private sector anticipates positive effects from the rate cut, there are concerns that commercial banks may still be reluctant to lend to SMEs. The private sector is thus urging the banking sector to cooperate and assist in lending to SMEs.