Thailand’s central bank unexpectedly dropped its long resistance to rate cuts earlier this week, underscoring how increasing concerns over economic growth are outweighing inflation risks across Southeast Asia.
The Bank of Thailand cut its one-day repurchase rate by 25 basis points on Wednesday, expected by only five of 28 economists. The rest saw the typically conservative central bank holding rates.
The decision came minutes after the Philippines central bank lowered its main rate to 6% as inflation pressures fade. Bank Indonesia shortly afterward left its main policy rate unchanged at 6%, near the highest in five years, as officials weigh renewed currency volatility with financial stability. Those results were widely expected by analysts.
The announcements show how central banks across the region are contending with slowing economies, leading monetary policies to diverge in coming months. While the Fed’s outsize 50 basis point cut last month created room for officials elsewhere to ease policy, it doesn’t necessarily mean all will follow.
“Asian central bankers are increasingly focused on risks to growth,” said Frederic Neumann, chief Asia economist at HSBC, citing a fading export boom and uncertainty about China’s stimulus impact. “As inflation concerns are fading, monetary officials are thus jumping at the opportunity to cut rates.”
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. The central bank had previously said that current rates are “neutral” and there were concerns that lower borrowing costs could worsen household debt levels.
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Thai central bankers maintained their outlook for economic growth this year at 2.7%, though they said that gains have been uneven across sectors. While inflation is largely in the rearview mirror across the region, signs are building of consumers pulling back and household finances coming under increased pressure.
“This turn has been long in the making,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, citing Thailand’s inflation below the central bank’s 1%-3% target range. He added that “the slowdown in economic growth is far from over” as consumption slows.
The Asian Development Bank revised down its growth forecast for Southeast Asia last month to 4.5% from 4.6% previously, 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.
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Inflation has taken hold across Asia Pacific in varying degrees — it’s less of a concern in countries like Indonesia. Meanwhile consumption has slowed in the Philippines and Thailand.
During the post-pandemic inflation surge and the Fed’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.
Bank of Thailand Assistant Governor Sakkapop Panyanukul said in a press conference following the announcement that the cut was not the start of an easing cycle, but rather a recalibration. The central bank has faced growing calls from politicians to ease policy to spur economic growth. GDP growth has averaged less than 2% a year for the past decade, lagging behind other developing economies.
That struggle will only intensify as the government is pushing the central bank to raise its inflation target band and install a critic of the BOT’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 communicated by Bangko Sentral ng Pilipinas Governor Eli Remolona in a Bloomberg interview. He called the moves “measured” and said the central bank wouldn’t move ahead of the Fed in a press conference today.
The central bank has scope to ease as inflation slowed to a four-year low. There’s also economic impetus— consumption weakened in the second quarter, as the most restrictive policy in 17 years weighed on households. The central bank expects that gross domestic product growth may fall below target over the next two years.
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Inflation is also less of a concern in Indonesia, where consumer prices rose at the slowest pace in three years last month. Signs are also building that Southeast 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 in a press conference today.
