Here's why a 25bps cut looms in Thailand

Is the government under pressure?

According to DBS, the Bank of Thailand (BoT) meets today and a 25bps cut to the policy rate to 2.50% is expected. Pressure has been mounting on the BoT to cut rates over the past six months asthe THB strengthened sharply againstits peers, thereby threatening export competitiveness. Moreover, the strong baht has also been blamed forthe lackluster performance in agricultural exports. 

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We think that BoT islikely to relentin a one-off 25bpsrate cutfortwo key reasons. Firstly, headline inflation hasstayed benign,reaching just 2.4% YoY in April, despite pressures coming from minimum wage hikesin the early part of the year.

In fact,the real policy rate is now positive at 0.35%. Secondly, GDP growth came in at 5.3% YoY in 1Q, below consensus expectations(6.0%). This loss of momentum can be used asjustification for monetary easing.

Based purely on growth/inflation dynamics,there isroom to cutrates. However, we reiterate that aggressive rate cutsfrom this point would risk a further buildup in asset prices, which could risk financialstability when the credit cycle turns. From financial stability standpoint, room to cutrates becomes a lot more limited.