Bank of Thailand cautions against interest rate cuts, highlighting short-term gains with potential long-term pitfalls. Senior Director Sakkapop Panyanukul emphasises winners and losers in the strategy, raising concerns about currency depreciation and inflation. Amid economic challenges, the central bank insists on the need for structural solutions beyond monetary policy.
Bank of Thailand officials this week warned that lowering interest rates was a short-term measure which may have negative side effects. Senior Director Sakkapop Panyanukul said such moves at length create winners and losers. In the meantime, any benefit would be only short-term. At the same time, it may lead to a fall in the baht and higher inflation. The briefing from the central bank comes ahead of the much-anticipated meeting of the Monetary Policy Committee on February 7th. The central bank faces unprecedented political pressure to lower the country’s base borrowing rate.
The latest economic analysis from the Bank of Thailand has just been given by Ms Chayawadee Chaianan, Assistant Governor for Corporate Relations.
Certainly, at this time, she accepted there are concerns about Thailand’s economic performance in the fourth quarter of 2023.
Thailand’s economic performance downturned in the last quarter of 2023 with even incoming foreign tourism income disappointing with only a marginal gain
Indeed, the BoT official acknowledged the economy has again fallen below expectations. Certainly, the central bank is on the verge of revising downwards its economic forecast for 2023. This has already been announced by the Ministry of Finance.
Its Fiscal Policy Office has confirmed only 1.8% growth last year.
The slow growth is attributed by the bank to structural problems plaguing various sectors. Ms Chayawadee emphasised the challenges now faced by Thailand’s manufacturing and export industry. Significantly, this is up to 60% of GDP.
The fourth quarter economic indicators highlight a struggling economic engine.
At the same time, tourism revenue was similarly disappointing. It only expanded by a mere 0.2%. Simultaneously, exports dropped 1% from the previous quarter.
Fall in industrial output is a cause of considerable concern to economic planners. Private and public investment fell back in the final quarter of 2023
Shockingly, industrial production decreased by 5.1% while private investment slowed down by 1.5%.
Furthermore, government spending also contracted. There was reduced capital expenditure by both the central government and state enterprises.
In addition, the latest data shows signs of job losses in manufacturing.
However, private consumption and the service sector managed to expand. It has played a crucial role in sustaining the Thai economy at this time.
General inflation saw a decline of 0.45% in the 4th quarter compared to the same period the previous year.
Looking ahead to January 2024, the BoT anticipates the economy gradually gaining momentum.
In particular, it sees domestic consumption and the tourism sector on the rise.
Bank of Thailand’s forecast of growing economic momentum in 2024 contingent on a stable geo-political situation even in the face of structural impairments
However, the outlook remains contingent on global trade recovery, geopolitical conflict, and government policy.
Ms Chayawadee emphasised as does her boss Governor Sethaput Suthiwartnarueput, that the BoT is keenly aware that structural issues are hindering recovery in export, industrial production, and tourism.
The Monetary Policy Committee (MPC) is expected to reduce the Thai economic forecast for 2023.
Initially, it projected 2.4%. Its next meeting on February 7, 2024, is being closely watched with the bank facing unprecedented political pressure to lower interest rates.
Ms Chayawad clarified that while the overall economy is in a slow recovery phase, the term ‘crisis’ depends on one’s perspective.
There are individual crises, notably high household debt, requiring targeted assistance measures.
Mr Sakkapop Panyanukul, Senior Director of the Financial Market Department, emphasised the limitations of monetary policy in addressing structural problems.
Thailand already has relatively low interest rates, top bank officials suggest any reduction would only have a very minimal impact and is not sustainable
He accepted interest rate reductions might provide short-term relief.
Nevertheless, such moves only buy time and do not offer a sustainable solution.
With Thailand already having one of the lowest interest rates globally, further rate cuts may have a limited impact.
The senior bank official also mentioned that such a move may see the baht weaken. He warned that such moves create winners and losers.
One side effect may be higher inflation and a greater risk of financial instability.
Domestic spending is not a problem at this time
In addition, he noted that at this point, domestic spending is not an issue, it is healthy.
As the BoT comes to terms with economic challenges, it looking beyond monetary policy. In short, it is emphasising the need for comprehensive solutions to structural issues.
Meanwhile, short term, the BoT’s focus is on targeted relief measures and managing credit access.
Bank of Thailand to tackle household debt in new plan from 2024 which will see higher standards
This reflects its commitment to addressing the household debt issue.
A concerted campaign, in short, a sophisticated ‘credit crunch’ is presently underway in association with the wider banking sector.
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Further reading:
It’s not an economic crisis, it’s a quagmire of structural problems that cannot be fixed overnight
Central bank: the corporate bond market is sound but the economy needs long-term structural reform
Government closely monitoring Thailand’s corporate sector bond market. Fears of a pending crisis
PM again attacks central bank on interest rates as deputy Finance Minister raises bond concerns
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Economy at crossroads: World Bank calls for structural reform to avert two decades of low growth
Fragile, weak economy sees central bank holding interest rates and reducing 2023 growth to 2.4%
Srettha’s crisis is not just an economic one, it is a ‘3D debt crisis’ that is strangling GDP growth
