The Monetary Policy Committee (MPC) voted 4-2 on Wednesday (Feb 25) to cut the policy rate by 25 basis points (bps) to 1%, effective immediately, reports the Bangkok Post.
Two members voted to keep the policy rate unchanged at 1.25%, according to the MPC secretary Don Nakornthab.
He said if the Thai economy progresses in line with the committee’s assessment, the downward interest rate cycle can be considered over.
However, the MPC preserved policy space of 50 bps compared with the low of 0.5% during the pandemic, given heightened uncertainty stemming from US tariff policy, said Mr Don.
"The latest rate cut may have surprised the market in terms of timing, but the market already expected the policy rate to be reduced to 1% this year," he said.
"The reduction represents front-loading to support the Thai economy over the next few months."
Under the baseline scenario, the central bank assumes the US tariff rate imposed on Thai exports will remain at 19% following the US Supreme Court striking down President Donald Trump’s tariff regime. The MPC plans to monitor tariff developments.
Although the Thai economy grew faster than expected in the fourth quarter of 2025, growth is projected to remain below its potential of 2.7% in both 2026 and 2027 due to structural constraints and intensifying competition.
The central bank estimates Thai GDP growth of 2% this year.
Restoring growth to its potential level will take time and the support of both monetary and fiscal policies, according to the regulator. The bank is scheduled to release its economic assessment at the MPC meeting in April.
According to Mr Don, interest rates in the banking system and financial markets have declined in line with previous policy rate cuts, helping to reduce financing costs and ease debt burdens for businesses and households.
However, borrowing costs continue to rise for small and medium-sized enterprises with high credit risk, while overall credit contracted.
This partly reflects financial institutions’ continued caution in extending loans to new and high-risk borrowers. The MPC plans to monitor the transmission of monetary policy and credit growth, and it will support targeted financial measures to assist vulnerable groups, he said.
"Commercial bank lending rates are primarily determined by market mechanisms," said Mr Don. "However, a reduction in the policy rate would help ease both financing costs and credit risks in the banking sector."
The panel expects the latest rate cut to partially ease the baht’s appreciation against the US dollar by influencing foreign capital inflows, particularly into the Thai bond market. The improved outlook for political stability after the election is expected to support foreign investment in the Thai equity market.
He said the baht appreciation against the US dollar was driven by the interest rate outlook for the Federal Reserve and Thailand-specific factors. The stronger baht has tightened financial conditions for exporters, especially those in highly competitive markets with low profit margins.
The MPC also expressed concern about signs of exchange-rate misalignment relative to economic fundamentals.
Baht movements and transactions that exert significant pressure on the currency should be monitored, while the effectiveness of existing regulatory measures on gold-related transactions should be assessed, noted the committee.
FASTER THAN EXPECTED
Economists were surprised by the "faster than expected" rate cut, as Thai GDP seems to be expanding better than forecast, meaning the central bank was not projected to rush a reduction.
"Probably the timing is right for the central bank to act to stimulate the economy before a new Cabinet is installed, with stimulus schemes launched from the third quarter," said Nuttaporn Triratanasirikul, deputy managing director of Kasikorn Research Center (K-Research).
The research house expected the MPC to start cutting the rate in June, she noted.
"The regulator has repeatedly stated the interest rate is adjusted to align with the economic situation, not imply an easing cycle," said Ms Nuttaporn.
For the rest of 2026, K-Research expects the central bank to keep the interest rate at 1% despite the ongoing threat from US tariffs, as Trump threatens to impose more levies on goods imported to the US.
Before Trump announced a global tariff last Friday (Feb 20), the centre upgraded its export forecast for 2026 from a contraction of 1.2% to growth of 1.6%, said Ms Nuttaporn.
Poonyawat Sreesing, senior economist at Siam Commercial Bank Economic Intelligence Center (EIC), said the surprise cut may have been prompted by the new threat posed by Trump’s tariff.
The EIC anticipated the MPC to start trimming the rate at its April meeting, or within the first half "to keep the policy space for a time when the economy really needs it".
"The central bank views the economy as continuing to expand at a rate lower than its real potential. Now the economy faces new uncertainties caused by US import duties," Mr Poonyawat told the Bangkok Post.
Last week the EIC upgraded its GDP growth estimate for 2026 to 1.8% from 1.5% following a strong GDP reading for the fourth quarter of 2025, he said.