Thai central bank rules out QE, interest rate hikes due to economic fragility

The Bank of Thailand (BoT) will not rush to raise interest rates or implement quantitative easing (QE), preferring instead to use an accommodative monetary policy, alongside targeted measures to support a fragile economy burdened by structural problems, according to the central bank chief.

Speaking at a high-level economic development seminar today, BoT Governor Vitai Ratanakorn stated that, while Thailand's projected GDP growth of 2.3% this year shows the country has averted a severe wartime crisis, the economy remains weak.

“The distinct roles of monetary and fiscal policy must be clearly understood,” Vitai emphasised.

He added that, while fiscal policy acts as a short-term economic booster, the central bank’s primary mandate is maintaining overall financial and price stability, keeping inflation within its target range of 1% to 3%.

"The role of monetary policy under my tenure is to sustain and support the economy, not to aggressively stimulate it," Vitai said, noting that broad tools like interest rates affect everyone and must be managed carefully.

Addressing structural weaknesses, the governor pointed out that Thailand's growth continues to follow a K-shaped recovery. This uneven distribution has left small and medium-sized enterprises (SMEs) struggling to access resources compared to major conglomerates, while low-income citizens bear the brunt of economic volatility.

To counter this stagnation, the central bank has lowered the policy rate twice, now at 1%, since Vitai took office, complementing the low rates with targeted measures aimed at long-term structural adjustments.

Regarding inflation, Vitai noted that cost-push pressures have begun to ease, as global crude prices have fallen faster than anticipated.

The BoT now projects that headline inflation for the year will stay below 2.8%, with no single month expected to exceed 4.5%.

Given these manageable levels, monetary policy can look past current inflationary pressures, meaning that the policy rate remains appropriate for now.

Vitai also dismissed calls from some economists for the central bank to inject liquidity through QE.

He explained that past liquidity injections merely resulted in commercial banks routing excess funds back to the BoT via the repurchase market the following day, failing to stimulate the actual economy.

"QE or massive liquidity injections, as seen in Western countries, simply do not yield effective results in Thailand's financial system," Vitai explained.

On the management of the local currency, he reiterated that the baht’s movement is determined by market mechanisms, adding that the BoT will only step in to curb excessive volatility that could harm local operators or jeopardise financial stability.

He cautioned, though, that any central bank intervention is strictly bound by international standards, including criteria set by the United States which caps currency interventions at 2% of GDP, ensuring Thailand avoids potential trade retaliations or investment barriers.