MPC cuts policy rate by 25 basis points to 1.25%

The Monetary Policy Committee (MPC) announced on Wednesday that it has decided to further reduce the policy interest rate by 25 basis points to 1.25%, anticipating a continued slowdown in the Thai economy next year.

MPC’s Decision to Lower Interest Rates

This rate cut follows a previous reduction on August 13, which lowered the rate by 25 basis points to 1.50%. The MPC had also decided to hold the rate at 1.50% during its meeting on October 8.

MPC Secretary-General Sakkapop Panyanukul stated that the MPC voted unanimously to reduce the rate to 1.25% with immediate effect, as it predicted that Thailand’s economy would continue to slow down through the first half of 2025, extending into 2026 and 2027. The expected slowdown is attributed to reduced private sector consumption and lower export growth, due to reciprocal tariffs imposed by the U.S.

Low Inflation Outlook and Economic Risks

Sakkapop added that the MPC anticipates headline inflation will remain low, driven by falling energy prices and limited demand-side inflationary pressures. He also mentioned that Thailand’s economic growth would fall below its potential, with loan growth expected to shrink, which could increase debt servicing challenges for vulnerable groups, including small and medium-sized enterprises (SMEs).

The MPC emphasized that Thai SMEs would face liquidity challenges, partly due to limited access to loans and the strengthening of the baht.

Economic Growth Projections and Risks

For the Thai economy in 2025, 2026, and 2027, the growth projections stand at 2.2%, 1.5%, and 2.3%, respectively. The economy in the second half of this year is expected to slow down due to temporary issues in the manufacturing sector, fewer tourists from nearby countries, and the ongoing flooding situation in the south, which is likely to impact economic activity into early next year.

In 2026, economic growth is expected to be lower than 2025, driven by slower private consumption due to reduced income and export challenges arising from U.S. tax policies. However, the tourism sector is projected to gradually recover.

For 2027, the economy is expected to begin recovering but remain below its potential, with services sector growth being the main driver. However, the export and manufacturing sectors will continue to face pressure from high competition.

Inflation and Deflation Risks

The MPC revised inflation projections for 2025, 2026, and 2027 downward, with expected inflation rates of -0.1%, 0.3%, and 1.0%, respectively. Inflation is expected to gradually return to the target range by the first half of 2027.

The low inflation forecast is attributed to global energy price reductions, government subsidies for living costs, and limited demand-side inflationary pressures. The risk of deflation is low, as the prices of goods and services have not broadly declined.

The MPC recommended closely monitoring deflation risks and noted that core inflation for 2025, 2026, and 2027 is expected to remain stable at 0.8%, 0.8%, and 1.0%, respectively.

Impact on Financial Markets and Credit Growth

Interest rates in the financial system and markets have decreased in line with the policy rate reduction, helping to lower financial costs and alleviate the debt burden on businesses and households. However, credit growth continues to contract, partly due to slowed private sector spending and investment amid high uncertainty.

Financial institutions remain cautious about lending to high-risk borrowers, especially SMEs and low-income households. The MPC has recommended monitoring credit expansion closely and supporting targeted financial measures to assist vulnerable groups.

Strengthening of the Thai Baht

The Thai baht has strengthened against the U.S. dollar, following adjustments to U.S. Federal Reserve interest rate forecasts and Thailand-specific factors. The MPC has recommended closely monitoring the movements of the baht, including considering measures to address transactions that significantly pressure the currency.

Long-Term Financial Stability

Under its monetary policy framework, the MPC aims to maintain price stability while supporting sustainable economic growth and preserving financial stability. The MPC believes that monetary policy should remain accommodative to support economic recovery. It will continue to monitor economic and inflationary trends, adjusting policy as needed.

At the same time, the MPC emphasized the importance of maintaining long-term financial stability, acknowledging the limited capacity of monetary policy to address unexpected events, Sakkapop concluded.