The Bank of Thailand voted 5 to 2 to keep its policy rate unchanged at 2.50% for the third time, while making dovish revisions to its growth and inflation forecasts. The decision was expected by the consensus, but differed from investment bank Maybank IB’s call for a 25 bps cut.
The majority on the monetary policy committee cited macro-financial stability as a consideration for opting to hold. The decision coincided with Prime Minister Srettha’s press briefing announcing the decision to forge ahead with the “digital wallet” handout in 4Q24, despite running into earlier hurdles in financing the scheme through loans.
Central Bank Sees -40% Plunge in Public Investment in 1Q24
The BOT downgraded its growth forecast for 2024 to 2.6%, from a range of 2.5%—3% previously. It also cut its 2024 CPI inflation projection to 0.6%, from the prior forecast of “around 1%”. The central bank saw private consumption and tourism driving growth, while expecting structural drags to limit a goods export recovery. It anticipated a rebound in public
investment from -39.6% y-o-y in 1Q24 to an average of 1% rise this year.
The BOT attributed cooling inflation to supply-driven raw food price declines and energy subsidies, projecting that headline inflation would return to its target (1 to 3%) by the year-end. It also noted that “uncertainties on the Thai economy remain high, particularly from export recovery, government budget disbursement and fiscal stimulus”.
PM Unveils Plans to Fund Digital Wallet via 2024/25 Budget
PM Srettha announced that the THB500bn (around US$14 bn or 3% of GDP) “digital wallet” handout would be funded fully by the budget instead of loans. The government said that funding would come from the 2024 fiscal budget (THB 175bn), the Bank for Agriculture and Agricultural Cooperatives 2025 budget (THB 172.3bn), and the 2025 fiscal budget (THB 152.7bn). The PM further said that the scheme will boost GDP growth by +1.2 to +1.6% points. Indications that the government was persisting with its plans to disburse the handout might have given the BOT reason to put off a rate cut, given the fiscal and FX uncertainty the move entails.
Crowding Out of Other Fiscal Spending Concerning, Expect June Rate Cut
Given the shift in funding source, there is a risk that spending on the digital wallet may crowd out needed public spending in other areas that might have stronger multipliers and impact on medium-term growth. This is especially since the 2024 budget would not have provisioned for digital wallet spending. Hence, Maybank said it thinks projections of the more than 1% point boost to GDP growth may be overstated, on net, if the crowding out was taken into account. The house expects the BOT to cut its policy rate at its next meeting on 12 June, as greater clarity on the slowing economic momentum emerges. Maybank IB said it maintains the 2024 GDP growth forecast at 2.9%, slightly above the BOT’s 2.6%.
