Surprise Thai rate cut highlights growth worries across South-east Asia
Across the region, signs of consumers pulling back and household finances coming under increased pressure are building
ONE of South-east Asia’s largest central banks unexpectedly cut interest rates, underscoring how increasing economic growth concerns outweigh inflation risks across the region.
The Bank of Thailand (BOT) cut its one-day repurchase rate by 25 basis points on Wednesday (Oct 16), expected by only five of 28 economists. The rest saw the typically conservative central bank holding rates.
“This turn has long been in the making,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, citing Thailand’s inflation rate, which is below the central bank’s target range of 1 to 3 per cent.
He added that “the slowdown in economic growth is far from over” as consumption slows.
The decision came minutes after the Philippines’ central bank lowered its main rate to 6 per cent as inflation pressures fade.
Bank Indonesia shortly afterwards left its main policy rate unchanged at 6 per cent, near the highest in five years, as officials weigh renewed currency volatility with financial stability. Those results were widely expected by analysts.
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The announcements show how central banks across the region are contending with slowing economies, with countries’ monetary policies to diverge in the coming months.
While the US Federal Reserve’s outsized 50-basis-point cut last month created room for officials elsewhere to ease policy, it does not necessarily mean all will follow.
The rate cut from Thailand was particularly shocking, since the central bank had resisted multiple calls from the government and business groups to ease policy. It had previously said that current rates are “neutral”, and there were concerns that lower borrowing costs could worsen household debt levels.
Thai central bankers maintained their outlook for economic growth this year at 2.7 per cent. However, they added that gains have been uneven across sectors.
While inflation is largely in the rear-view mirror across the region, signs of consumers pulling back and household finances coming under increased pressure are building.
The Asian Development Bank last month revised down its growth forecast for South-east Asia to 4.5 per cent, from 4.6 per cent previously.
This was driven by weaker expectations for Thailand and Myanmar. The group added that, in general, the region remains “resilient”, with higher consumption and improvement in exports.
Inflation has taken hold across Asia-Pacific in varying degrees, with rising price levels less of a concern in some countries. Meanwhile, consumption has slowed in the Philippines and Thailand.
During the post-pandemic inflation surge and the US Federal Reserve’s aggressive policy response, officials across Asia shared similar foes: high prices and the need to protect their currencies from a growing rate differential with the US.
Domestic concerns, unique in each country, now make rate calls trickier.
BOT governor Sethaput Suthiwartnarueput said in a press conference following the announcement that the cut was not the start of an easing cycle, but rather a recalibration.
He faced growing calls from politicians to ease policy to spur economic growth. The growth in gross domestic product has averaged less than 2 per cent a year for the past decade, behind other developing economies.
The struggle will only intensify as Thailand’s government pushes the central bank to raise its inflation target band and install a critic of the Thai central bank’s hawkish stance as chairman.
The Philippines is set to move more aggressively than many peers including Thailand, with a plan to slash its benchmark rate by around 175 basis points by 2025, as indicated by Bangko Sentral ng Pilipinas governor Eli Remolona.
He called the moves “measured”, and on Wednesday said the Philippine central bank would not move ahead of the US Federal Reserve.
The Philippines’ central bank has scope to ease as inflation slowed to a four-year low.
There has also been an economic impetus: Consumption weakened in the second quarter, as the most restrictive policy in 17 years weighed on households. The central bank expects that growth of gross domestic product may fall below target over the next two years.
Inflation is also less of a concern in Indonesia, where consumer prices last month rose at the slowest pace in three years.
Signs are also building that South-east Asia’s biggest economy is rapidly cooling: Manufacturing activity has contracted since the summer and factory closures have led to layoffs.
Bank Indonesia, which cut rates unexpectedly last month just ahead of the Fed, is seen joining the Philippines in easing policy this year, though perhaps not as quickly. Here, the nation’s currency weakening in recent months threatens to put central bankers on hold.
Perry Warjiyo, governor of Bank Indonesia, said that officials are keeping an eye on room for policy rate cuts. BLOOMBERG
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