Thailand's Interest Rate Debate: Government Pushes for Cut, Central Bank Expected to Hold

Key Takeaway

• Thailand's government urges a rate cut to boost economic growth, but the central bank is expected to maintain the 2.5% rate.
• Thai stocks have declined 7% YTD, with global funds selling nearly $2.5 billion of Thai stocks amid fiscal-monetary policy disparity.
• Political pressures complicate interest rate decisions in the US and UK, while Indonesia downplays rupiah weakness without immediate rate hikes.

Thailand's Interest Rate Debate

Thailand’s government has renewed its call for the central bank to lower the key interest rate, which currently stands at a decade high. Deputy Finance Minister Paopoom Rojanasakul emphasized that the policy rate is “too high” for the current state of Thailand’s economy and does not align with the government’s strategy to stimulate growth through increased spending. “The rate cut will send a signal that we are stepping on the accelerator on the economy, in sync with our fiscal policies,” Paopoom stated after a Cabinet meeting on Tuesday.

Prime Minister Srettha Thavisin and his officials have consistently advocated for lower borrowing costs to support the economy, which has grown at a rate of less than 2% over the past decade. Despite these calls, the Monetary Policy Committee is expected to keep the key rate unchanged at 2.5% for the fourth consecutive meeting on June 12, according to a Bloomberg survey of economists.

The disparity between fiscal and monetary policy, along with delayed budget approval and weak consumer spending, has contributed to recent losses in the stock market, Paopoom noted. He anticipates that Thai stocks will improve as the government accelerates spending and implements its cash handout program in the fourth quarter. The benchmark SET Index of stocks has declined 7% year-to-date and is trading near its lowest level since November 2020. Global funds have sold nearly $2.5 billion of Thai stocks on a net basis so far this year, according to Bloomberg data.

Political Influence on Central Banks

Mounting political pressure is complicating interest rate decisions in the US and the UK, where central banks are cautious about cutting borrowing costs as elections approach. The Bank of England (BoE) and the Federal Reserve (Fed) are wary of appearing to support incumbent governments by reducing rates too close to polling day. Charles Goodhart, a former member of the BoE’s Monetary Policy Committee, remarked, “The central banks don’t want to appear to be playing politics at all, so the easiest thing is to do nothing.”

Western central banks, including the Bank of Canada and the European Central Bank, have already begun easing monetary policy with initial rate cuts. However, the Fed and BoE are lagging as they contend with persistent inflation in the services sector. In the US, markets expect the Fed to cut rates in mid-September, its final meeting before the November 5 presidential election, despite a strong jobs report. Adam Posen, director of the Peterson Institute for International Economics, noted that the strong US economy makes a pre-election rate cut unlikely.

In the UK, the BoE faces a similar dilemma with its next meeting scheduled just two weeks before the July 4 general election. Governor Andrew Bailey has indicated that a rate cut is imminent, but political considerations may delay action. Former BoE policymakers suggest that the bank may need a compelling reason to change rates shortly before an election.

Indonesia's Currency Situation

Indonesian President Joko Widodo, commonly known as Jokowi, has downplayed concerns about the rupiah’s recent weakness, indicating minimal political pressure for the central bank to raise interest rates. The rupiah has been trading between 16,200 and 16,300 against the US dollar, which Jokowi described as “still in a good position.” He attributed the currency’s depreciation to global pressures, noting that “all countries are experiencing the same thing, pressured by the dollar.”

This stance contrasts with Indonesia’s approach in April when the government took measures to stem a currency rout, including a surprise rate hike by Bank Indonesia. Currently, Bank Indonesia appears more confident, with Executive Director for Monetary Management Edi Susianto stating that the rupiah should remain manageable and stronger than 16,300 per dollar. The central bank plans to continue market interventions and leverage ample dollar supply from exporters and foreign fund inflows to support the currency.

The rupiah has declined 2.6% this quarter to a four-year low, facing pressure from seasonal dividend payments, Hajj pilgrimage outflows, and a selloff in emerging markets amid uncertainty over the Federal Reserve’s policy path. Despite these challenges, the central bank may opt for measures other than raising the BI-Rate when it meets on June 20.

Management Quotes

• Paopoom Rojanasakul, Deputy Finance Minister of Thailand:

  "The rate cut will send a signal that we are stepping on the accelerator on the economy, in sync with our fiscal policies."

• Paopoom Rojanasakul, Deputy Finance Minister of Thailand:

  "The rate is too high for the state of Thailand’s economy and is not fully aligned with the government’s strategy to spend and boost growth."