MPC cuts interest rate to 1.00%, aiming to support recovery and ease debt burden

MPC votes 4-2 to reduce interest rate, with focus on economic recovery and inflation control

The Bank of Thailand's Monetary Policy Committee (MPC) voted 4 to 2 to cut the policy interest rate by 0.25%, from 1.25% to 1.00% per annum, effective immediately. The two dissenting members preferred to maintain the rate at 1.25%.

The decision comes as the Thai economy shows signs of stronger-than-expected growth in the fourth quarter of 2025, though the outlook for 2026 and 2027 remains challenging. The MPC acknowledged structural impediments and intensified competition, with the economy projected to grow below potential and uneven across sectors.

Economic Growth and Inflation Outlook

The economy’s growth in Q4 2025 exceeded expectations, driven by stronger-than-anticipated private investment and merchandise exports. However, the MPC projects that growth will remain below potential in 2026 and 2027 due to structural constraints and increasing competition, particularly in the technology sector, which has seen limited value addition compared to previous years.

While merchandise exports and private sector investment are expected to improve, private consumption is projected to slow down, reflecting a less favorable outlook. The MPC also cited uncertainties surrounding U.S. tariff measures, delays in the 2027 budget, and ongoing challenges for SMEs due to heightened competition, limited access to credit, and the appreciation of the baht.

Headline inflation for 2026 and 2027 is expected to face increased downside risks due to falling energy prices and potential additional government measures. The core inflation is expected to be slightly lower and stay at a low level, with deflationary risks remaining low.

Monetary Policy and Financial Stability

The majority of the committee supported the rate cut to ensure that financial conditions remain conducive to economic recovery and to alleviate debt burdens for SMEs and households. The committee also highlighted the importance of monitoring financial stability in the medium term, particularly the limited capacity of existing monetary policy given the current high uncertainty.

The MPC expressed concerns over the appreciation of the baht, which has pressured exporters, especially those dealing with products in price-sensitive markets with low-profit margins. The committee will closely monitor the baht's movements and evaluate the effectiveness of existing measures related to gold transactions and other financial operations that may impact the currency.

Challenges for SMEs and Credit Expansion

While the interest rate cuts have led to a reduction in overall borrowing costs and eased debt burdens for businesses and households, credit expansion remains sluggish, particularly for high-risk SMEs. Financial institutions are still cautious in lending to new borrowers and those with high-credit risks. The MPC emphasized the need to continue monitoring the transmission of monetary policy and the growth of credit while supporting targeted financial measures to help vulnerable groups.

Baht Appreciation and Exchange Rate Concerns

The baht has appreciated against the U.S. dollar, in line with the U.S. Federal Reserve's interest rate outlook and specific factors in Thailand. This has exacerbated financial conditions for exporters. The MPC expressed concern over potential misalignments in the exchange rate from economic fundamentals and will continue to monitor these movements closely.