According to Cailian News on October 16th (edited by Shi Zhengcheng), on Wednesday evening Beijing time, the Bank of Thailand unexpectedly announced a 25 basis points cut in the key interest rate to 2.25%, the first rate cut for the second largest economy in Southeast Asia since May 2020.

The rate decision shows that the Monetary Policy Committee of the Bank of Thailand made this decision by a 5-2 vote, with two dissenters supporting keeping the policy rate unchanged.

(Source: Bank of Thailand)

Why the sudden easing?

In fact, the vast majority of economists did not anticipate that the Bank of Thailand would cut interest rates today. For a long time, the Bank of Thailand has been resisting calls from the Thai government and business groups to loosen policy rates.

In the policy statement, the majority said that a 25 basis point rate cut would help ease the interest burden on borrowers. Considering the expected slowing of loan growth, the policy rate will remain neutral, in line with the economic potential, so the rate cut will not hinder deleveraging of debt. Dissenters emphasized the importance of long-term macrofinancial stability and the need to maintain policy space in long-term uncertainty.

The Bank of Thailand expects the country's economic growth rates for the next two years to be 2.7% and 2.9%, respectively. At the same time, they acknowledge that recovery among different sectors is uneven, with many commodities exports, manufacturing, and small and medium enterprises facing structural obstacles. The Bank of Thailand also anticipates that the country's overall inflation rates for the next two years will be 0.5% and 1.2%.

While Thailand unexpectedly slashed interest rates, the Central Bank of the Philippines also announced a reduction in policy rates to 6% to reflect the backdrop of slowing inflation. Meanwhile, Indonesia, the largest economy in Southeast Asia, has maintained its policy rate at a high of 6% for nearly 5 years, in line with market expectations.

This series of decisions also shows that despite the Federal Reserve cutting rates significantly by 50 basis points last month, providing room for officials in other regions to ease policies, the actual implementations vary greatly.

Each entity has its own circumstances.

The Asian Development Bank lowered its Southeast Asian economic growth forecast from 4.6% to 4.5% last month, mainly due to the anticipated softness in Thailand and Myanmar. At the same time, consumption in Thailand and the Philippines also slowed down. Indonesia, while maintaining a 5% economic growth pace, does not need to worry too much about inflation.

During the press conference after the interest rate cut announcement, Bank of Thailand Governor Sethaput emphasized that the rate reduction does not signal the start of an easing cycle, but rather a 'recalibration'.

Given Thailand's average economic growth rate below 2% in the past 10 years, lagging behind other developing economies, Sethaput is facing increasing calls for more aggressive easing. The Thai government is pushing the central bank to raise the inflation target range and is preparing to appoint a critic who views the bank as 'too hawkish' as governor.

The Philippines will continue with interest rate cuts, expecting a total reduction of 175 basis points by 2025. Philippine Central Bank Governor Remona stated that such measures are 'moderate', emphasizing that their rate cuts will not be faster than the Federal Reserve's.

Indonesia is also on a path of rate cuts but is not expected to move as quickly as the Philippines. The Indonesian central bank unexpectedly delivered its first rate cut in three years last month, but concerns over currency depreciation are limiting their room for further rate cuts. Indonesia's September CPI has dropped to a nearly three-year low, while the country's manufacturing activity has been contracting since summer, leading to factory closures and layoffs.