BOT details eight policy tools to bolster Thailand’s uneven recovery

The Bank of Thailand has detailed eight monetary and financial policy tools it can use to support an economy facing slow and uneven growth, restricted credit access and persistent structural weaknesses.

BOT Governor Vitai Ratanakorn said Thailand’s economy was not performing well, but had proved more resilient than initially expected. The central bank forecasts economic growth of 2.3%, although the benefits remain highly concentrated.

 

“The economy is not good, but it is not as bad as we thought,” Vitai said. “The Bank of Thailand forecasts growth of 2.3%. It is not high, but it is not terrible. However, the growth is not evenly distributed.”

He described the recovery as K-shaped, with wealthier borrowers and large businesses still able to secure financing relatively easily, while low-income households and small and medium-sized enterprises struggle to obtain loans.

This uneven recovery stems from structural problems accumulated over many years, including labour constraints, inequality and declining competitiveness.

The BOT must therefore select and combine eight tools according to the nature of each problem: the policy interest rate, reserve requirements, standing facilities, open-market operations, quantitative easing, targeted lending, foreign-exchange intervention and macroprudential measures.

1. Policy interest rate

The policy interest rate is the BOT’s principal conventional instrument for influencing borrowing costs and economic activity.

Vitai stressed that monetary policy is not intended primarily to propel economic growth in the same way as direct government spending or cash-distribution programmes. Its role is to cushion the economy and preserve stability.

The BOT is pursuing an accommodative monetary stance, with the policy rate reduced to 1% to ease pressure on businesses and households during the slow recovery.

Policy-rate decisions are made by the seven-member Monetary Policy Committee, which meets six times each year.

When the committee raises or lowers the rate, the change directly affects short-term money-market rates, including the one-day repurchase rate. It then passes gradually into commercial banks’ financing costs and lending rates.

Vitai said the full effect may take between six and 12 months to reach the wider economy, but the policy rate remains an important benchmark for borrowing costs across the country.

2. Reserve requirements

The second tool determines how much of their deposits commercial banks must hold with the central bank rather than use for lending.

For example, when a bank receives 100 baht in deposits, it must place a specified proportion with the BOT. Raising the requirement restricts banks’ lending capacity, while lowering it releases more money into the financial system.

China frequently uses this instrument and has maintained a reserve requirement of about 6%.

Thailand, however, has kept its requirement at only 1% since 2012. Vitai said the level was already so low that the BOT had virtually no room to reduce it further to stimulate economic activity.

This means the instrument is technically available but offers little additional support under current conditions.

3. Standing facilities

Standing facilities act as daily emergency channels through which financial institutions can deposit surplus funds or borrow short-term liquidity from the central bank.

The deposit facility allows a commercial bank with excess cash at the end of the day to place the money with the BOT.

The lending facility works in the opposite direction. A bank facing an unexpected liquidity shortage can borrow from the central bank to maintain normal operations and meet its immediate obligations.

Vitai said the BOT has these mechanisms in place and uses them routinely to balance surpluses and shortages in the banking system.

However, standing facilities are not designed to tackle inflation or stimulate the broader economy directly. They function as a financial backstop, preventing institutions from being disrupted or failing because of temporary liquidity problems.

4. Open-market operations

Open-market operations allow the BOT to inject money into or withdraw money from the financial system through transactions in financial markets.

The central bank regularly uses three main mechanisms.

The first is bilateral repurchase transactions, or repos, which involve short-term borrowing and lending between the BOT and commercial banks, with bonds used as collateral.

The second is the issuance of BOT bonds to absorb surplus cash from the banking system.

The third is foreign-exchange swaps, which allow the central bank to manage baht liquidity through the foreign-currency market.

These operations help ensure that the financial system has an appropriate amount of daily liquidity and keep short-term market interest rates aligned with the policy rate.

5. Quantitative easing

Quantitative easing, commonly known as QE, involves creating money or purchasing large volumes of long-term assets to inject liquidity into the financial system.

One approach is for a central bank to buy long-term government bonds with maturities of 10, 30 or 50 years. Large-scale purchases increase the amount of cash in the market and push down long-term bond yields.

A central bank can also create domestic currency to purchase US dollars when its own currency is considered excessively strong, releasing more local currency into the financial system.

Supporters of QE often refer to the economic equation MV = PQ, in which the money supply multiplied by the speed of circulation equals the price level multiplied by economic output.

The theory suggests that increasing the amount of money in the system should help increase nominal economic activity.

Vitai, however, argued that the structure of Thailand’s economy limits the effectiveness of QE.

Thailand is a bank-based economy in which households and businesses rely predominantly on commercial and state-owned banks for financing. It is not a capital-market-based economy like the United States.

Thai loan costs are therefore generally linked to commercial-bank rates such as the minimum lending rate, minimum retail rate and minimum overdraft rate.

Reducing the yield on a 30-year government bond would not necessarily lower these commercial lending rates or reduce borrowing costs for ordinary customers.

Vitai said liquidity injected through QE might simply flow back to the central bank through the repo market and other open-market operations without generating significant new lending or economic activity.

“You could use 300 billion or 500 billion baht to buy long-term bonds through QE,” he said. “The following day, that 500 billion baht could flow straight back to the central bank through open-market operations and the repo market. What would happen to the economy? Nothing. That is Thailand’s context.”

6. Targeted lending and soft loans

Targeted lending facilities and soft-loan programmes are designed to channel financing towards particular groups that cannot obtain sufficient credit through the normal banking system.

The BOT previously had greater scope to provide loans itself, but current central-bank legislation no longer permits it to lend directly.

It must instead work with state-owned specialised financial institutions, such as the Government Savings Bank, to deliver soft-loan programmes.

These include SMEs Credit Boost and SMEs Secure+, which have together approved more than 43 billion baht in financing for small and medium-sized enterprises.

Vitai said targeted measures were particularly important because Thailand’s K-shaped recovery had created a serious imbalance in financial access.

Large companies can obtain substantial funding at very low costs, while SMEs face contracting credit lines or are unable to borrow at all.

A broad policy measure such as an interest-rate reduction affects the entire financial system but cannot force banks to approve loans for smaller or riskier borrowers.

The BOT must therefore employ targeted measures to address the specific barriers preventing SMEs from obtaining working capital and investment funding.

7. Foreign-exchange intervention

The seventh tool allows the BOT to intervene in the foreign-exchange market when movements in the baht become excessively volatile or are driven by abnormal transactions.

Vitai said the central bank was not constantly trading currencies and could not intervene simply to create a competitive advantage for Thai exporters.

Excessive intervention could expose Thailand to scrutiny from the United States over possible currency manipulation. He referred to a threshold equivalent to 2% of gross domestic product.

Most foreign-exchange transactions in Thailand take place directly between commercial banks or between banks and their customers, including importers and exporters.

The BOT generally steps in only when the baht strengthens or weakens too rapidly, or when unusual transactions distort market conditions.

Vitai cited speculative online gold trading as an example of activity that had placed abnormal appreciation pressure on the currency.

The central bank responded by limiting online gold transactions to 50 million baht per customer per day on each platform. The measure helped reduce volatility in the baht, he said.

Foreign-exchange intervention is therefore intended to maintain orderly market conditions rather than fix the currency at a particular level or provide a permanent trade advantage.

8. Macroprudential measures

Macroprudential measures are targeted rules intended to prevent or contain particular risks that could threaten financial stability.

Vitai compared the policy interest rate to a broad medicine that affects the whole country, while macroprudential measures act as specific treatments for individual vulnerabilities.

He identified three principal areas in which such measures may be used.

The first is the loan-to-value ratio, which limits mortgage lending relative to the value of a property. The rule is designed to prevent excessive borrowing for speculative purchases of houses and condominiums and reduce the risk of a property bubble.

The second involves debt-to-income and debt-service ratios, which can limit how much debt a borrower carries or repays relative to income. These measures are intended to prevent households from taking on obligations beyond their capacity to repay.

The third area is the regulation of buy now, pay later services.

Vitai warned that these services can make borrowing excessively easy for inexperienced and financially vulnerable consumers. Simple application procedures may encourage people to accumulate debt for luxury or unnecessary goods without adequately assessing repayment risks.

The BOT is therefore preparing measures that may include minimum-age requirements, restrictions based on the type or value of goods purchased, interest-rate ceilings and stronger disclosure requirements for service providers.

The aim is to protect consumers and prevent people from becoming heavily indebted at an early age.

Eight tools must work together

The BOT’s framework demonstrates that no single monetary-policy tool can resolve all of Thailand’s economic difficulties.

Interest-rate reductions can ease borrowing costs across the system, but they cannot guarantee that loans reach SMEs. Liquidity operations can keep banks functioning smoothly, but they do not directly solve structural inequality.

QE can inject large amounts of money, but its impact may be limited in a financial system where most borrowers depend on bank lending rather than capital markets.

Targeted lending can direct funds towards vulnerable businesses, while foreign-exchange intervention and macroprudential regulations can address specific currency, debt and financial-stability risks.

Vitai said legal and structural constraints meant the BOT could not stimulate the economy as rapidly as the government could through direct fiscal spending.

Its approach is therefore to combine accommodative interest rates with liquidity management, targeted financing and specific financial safeguards.

The policy mix is intended not only to support Thailand’s uneven recovery but also to address debt vulnerabilities and preserve the stability of the financial system over the longer term.