Thailand’s central bank surprised markets by raising its key interest rate for the eighth consecutive meeting, citing expectations of improved economic growth and inflationary pressures in the coming year, despite global uncertainties. The Bank of Thailand (BOT) declared that the rate had now reached a ‘neutral’ level, providing support for long-term sustainable growth in the country. This move came as a surprise to economists who had predicted that the tightening cycle, which has seen the key rate rise by a total of 200 basis points since August 2022, may be coming to an end. The BOT’s monetary policy committee unanimously voted to raise the one-day repurchase rate by 25 basis points to 2.50%, the highest level in ten years.
Although the BOT reduced its economic growth projection for 2023 from 3.6% to 2.8%, it raised its outlook for 2024 from 3.8% to 4.4%. The central bank noted that growth is expected to pick up in 2024 due to increased domestic demand, driven by a recovery in tourism and merchandise exports, along with support from government policies. Some analysts suggested that the BOT may be taking preemptive action against potential inflationary impact stemming from the government’s stimulus plans. However, most economists do not anticipate any further interest rate hikes in the near term, given the current below-target inflation rate and mounting headwinds to economic recovery.
Following the rate decision, the Thai baht initially weakened but later pared losses. The currency has depreciated more than 5% year-to-date against the US dollar. The BOT clarified that the rate hike was not primarily driven by the baht’s weakness, as it was in line with other regional currencies also facing pressure from the strengthening US dollar. The BOT highlighted that the current interest rate should be appropriate if there are no significant changes to the country’s economy. Thailand’s economy expanded by just 1.8% in the second quarter of 2023 compared to the previous year, with a decline in exports being the primary factor contributing to the slowdown. The BOT revised its forecast for foreign visitor arrivals downward, and while the central bank expects a slight boost in exports next year, it anticipates a decline of 1.7% in 2023 due to weak global demand.