The Monetary Policy Committee (MPC) is concerned about uneven economic recovery and rising cost of living, and is watching out for "zombie firms" subtly siphoning liquidity.

The latest Monetary Policy Committee (MPC) meeting report reveals an uneven economic recovery, concerns about rising living costs, and the need to monitor the problem of unprofitable companies (Zombie Firms) that are draining liquidity from businesses.

8 July 2569 – Bank of Thailand (BoT) The summary minutes of the Monetary Policy Committee meeting No. 3/2569, held on June 19 and 24, 2569, have been released. The committee unanimously resolved to maintain the interest rate at 1% per annum.

Directors who attended the meeting

Mr. Witai Rattanagorn (Chairman), Mr. Piti Disayathat (Vice Chairman), Ms. Suwannee Jetsadasak, Mr. Paiboon Kittisrikangwan, Mr. Chaow Kengchon, Mrs. Saowanee Thairungroj, and Mr. Somchai Hanhiran.

Assessment of the economic picture and inflation

The Thai economy is projected to grow faster than previously estimated, driven primarily by merchandise exports and private investment, which are expected to continue expanding strongly due to the upward cycle of technology and artificial intelligence. Meanwhile, the impact of the conflict in the Middle East on the economy is less than anticipated, as the situation appears to be improving and businesses have adapted better than expected. However, SMEs have adapted only with limited capacity and still face intense competition. Furthermore, government measures to mitigate the impact of the energy crisis have helped reduce costs for businesses and partially lessened the impact of rising living costs on households.

Thailand's economic growth remains low and uneven, with projected expansion rates of 2.3% and 1.8% in 2569 and 2570, respectively.

(1) Exports of goods tend to continue to expand at a high rate, but mostly in the technology product group, which is highly dependent on importing parts from abroad, while exports of non-technology related goods continue to expand at a low rate due to ongoing problems with competitiveness.

(2) Private sector investment is likely to continue expanding, but mostly it is investment in technology and digital businesses, data centers and electric vehicles, following the upward trend in technology and artificial intelligence cycles, which are expected to continue for about 2 years. However, some businesses are still slowing down investment, especially SMEs and business sectors facing high competition and weak purchasing power, such as the automotive business, hotels, transportation and real estate.

(3) The tourism sector is likely to improve, although the number of tourists is expected to remain close to the original levels of approximately 33 and 35.5 million people in 2569 and 2570, respectively. However, overall tourist revenue is expected to increase due to the increasing proportion of tourists with high per capita spending, namely long-haul tourists and Chinese tourists.

(4) Private consumption is under pressure from high living costs and slowing income trends. However, government measures have helped to sustain consumption in the short term, resulting in private consumption in 2569 likely to expand higher than previously estimated, but will decline in 2570 when the effects of the measures wear off and due to the high base in 2569.

The committee inquired about the factors pressuring private consumption to continue growing at a low rate, even though energy prices have begun to decline, and asked whether private consumption has been affected differently by different income groups. They noted that the uneven economic recovery may have a greater impact on employment and income prospects for SMEs and vulnerable households than other groups.

The Secretariat explained that the continued low growth in private consumption in 2569 and 2570 is a result of both slowing real income and the pre-existing financial vulnerability of certain household groups, particularly low-income groups facing high debt burdens. Furthermore, although energy prices are projected to decline, the cost of living continues to rise due to the pass-through of costs to the prices of goods and services.

Regarding private consumption broken down by income group, it was found that consumption had slowed down across all income groups, not just low-income groups. Furthermore, the decline in consumption was not limited to energy but was also seen in other categories, particularly eating out, reflecting increased caution in household spending.

The committee believes that the improving trend in private sector investment will be a key driver of the economy in the coming period. However, changes in the pattern of foreign direct investment (FDI) may reduce the benefits to the Thai economy. Over the past two years, most investments seeking promotion from the Board of Investment (BOI) have been in the digital sector, which is highly dependent on imports. This differs from the past, when applications for promotion covered a wider range of business sectors, such as hotels and the food industry, thus resulting in decreased value-added contributions to the economy.

Furthermore, the committee discussed the actual timeframe for FDI investment after receiving promotion, noting that it might occur faster. One committee member added that the actual investment timeframe depends on the nature of the project. Projects that expand existing businesses or are continuation investments typically take about 6 months to 1 year to complete, while newly established projects take longer, averaging around 2 years.

Furthermore, investment in digital businesses and data centers is highly competitive and has short investment cycles, resulting in faster project implementation after receiving incentives.

The committee believes that the current account and trade deficits are due to temporary factors and will return to surpluses in the second half of 2026. The trade deficit in the first five months of the year was mainly caused by increased imports, both in volume and price, during the conflict in the Middle East, as well as the import of electronic components to support the export of technology goods.

However, the trade balance is expected to gradually improve in the second half of the year due to the downward trend in oil prices and a reduction in imports resulting from the gradual depletion of inventories that were rapidly imported in the preceding period.

Headline inflation is projected to remain close to our estimates, averaging 2.8% and 1.4% in 2569 and 2570, respectively. Inflation is expected to exceed the target range for the remainder of 2569 due to the transmission of energy prices and costs, before declining in 2570 as supply-side factors gradually ease and due to the high base effect from the previous year. Core inflation is projected at 1.5% and 1.4% in 2569 and 2570, respectively.

The majority of price increases for goods and services are still in the energy sector and categories affected by higher energy and raw material costs. Meanwhile, there are no signs of widespread and sustained price increases, partly due to limited cost pass-through by businesses under weak demand.

For medium-term inflation forecasts, the outlook remains anchored within the target range. However, even though the war situation shows signs of improvement, the price transmission by businesses, as well as medium-term inflation expectations in an environment where prices and costs remain high, need to be monitored.

The committee inquired about the assumption that crude oil prices are trending downwards but still remain higher than current crude oil prices, and the main factors that would cause inflation in the second half of this year to continue rising from current levels, even though global crude oil prices have begun to decline.

The Secretariat clarified that the projected crude oil prices for 2569 and 2570 are at $90 and $80 per barrel, respectively, which are higher than current levels. This is due to expectations of increased demand in the near future to compensate for depleted reserves, and because geopolitical uncertainties remain, even with improved developments in the conflict, such as the implementation of agreements between the US and Iran.

Factors that will likely keep inflation high in the second half of this year are (1) businesses are still in the process of passing on costs, generally the passing-on period is about 6 months from the acceleration of energy prices, and (2) the effect of the El Niño phenomenon on fresh food prices in the second half of the year. However, if crude oil prices remain at current levels, the inflation estimate for this year will be lower than previously estimated.

The committee expressed concern over rising household living costs, noting that even if inflation declines in the future, persistently high price levels will impact the cost of living and purchasing power, particularly among low-income groups, thereby hindering private consumption in the near future. The secretariat further explained that rising inflation affects low-income households more than middle-to-high-income groups because the prices of low-cost goods tend to increase at a faster rate than their premium counterparts. Low-income households, which consume a higher proportion of low-cost goods relative to their income, are therefore more affected by price increases than high-income groups.

The committee believes that inflation will decline in the near future and not remain high for an extended period. Furthermore, Thailand's inflation risk is relatively low compared to other countries, as demand-side inflationary pressures are limited amidst slow economic growth. One committee member added that low inflation in Thailand's services sector contributes to the limited risk of persistently high inflation.

Furthermore, some committee members noted that the prices of some goods and services, such as housing rents, had changed little or not at all recently. This was attributed to the survey potentially not comprehensively covering changing consumer behavior, such as the increasing proportion of people living in condominiums.

The Secretariat clarified that the Ministry of Commerce, in collaboration with the Bank of Thailand, is developing the Consumer Price Index (CPI). Most recently, the Office of Trade Policy and Strategy, Ministry of Commerce, has conducted a survey on housing rent to expand its sample size and is currently reviewing its accuracy. It is expected that this data will be incorporated into the CPI calculation in early next year. Furthermore, they are considering integrating data such as communication service charges and medical expenses from relevant agencies to help improve the CPI and better reflect the changes in commodity prices that consumers face.

Assessment of financial conditions and financial system stability

Asset prices and exchange rates fluctuated significantly depending on the situation in the Middle East and the direction of US monetary policy. Stock market indices declined, particularly in the technology sector, and regional currencies, including the Thai baht, weakened against the US dollar due to the strengthening of the US dollar following indications of tighter US monetary policy.

The rapid and significant depreciation of regional currencies is attributed to additional country-specific factors. Some committee members inquired about the stability of the Thai baht. The Secretariat clarified that the recent leading depreciation of the baht in the region is partly due to temporary, specific factors, but the baht remains stable overall. Thailand's external position is strong, reflected in high international reserves and low foreign debt. In addition, foreign investors continue to have confidence in Thailand's good governance and policy implementation.

However, the committee deemed it appropriate to monitor the movements of the Thai baht and intervene if the baht exhibits unusually high volatility.

Total loan growth was low and primarily driven by large corporate loans. This was partly due to increased demand for liquidity amidst rising costs and partly due to increased economic activity, such as the demand for capital for trade and investment in manufacturing sectors related to the technology and artificial intelligence cycles. Meanwhile, SME loans continued to contract, reflecting limited access to credit and the caution of financial institutions in lending to high-risk borrowers.

Credit quality remains stable, but the repayment ability of SMEs and vulnerable households needs to be monitored. Interest rates in the commercial banking system as a whole remain stable. Interest rates for large and medium-sized businesses are trending downwards, partly due to improved borrower screening. However, interest rates for micro-SMEs remain high due to higher credit risk and increased lending through high-interest loan products.

The committee inquired whether the continued contraction of SME loans and deteriorating loan quality showed discrepancies across business sectors or borrower groups. They noted that continuous monitoring of loan quality in the second half of the year is necessary because the grace period before a loan is classified as non-performing (NPL) exceeds 90 days, meaning the impact of the war on loan quality is not yet apparent. The secretariat explained that SME loans contracted across all business sectors, with most new loans being disbursed to existing borrowers.

Regarding credit quality, which has deteriorated across several business sectors, it is estimated that the ratio of non-performing loans will not increase dramatically. The deterioration in credit quality is partly due to the re-establishment of non-performing loans in (1) groups directly affected by the war, such as the food and beverage industry, rubber and plastics, transportation, and construction materials, and (2) groups that were already vulnerable, such as trade, real estate, construction, textiles, and tourism.

Some committee members believed that SMEs are under pressure from fierce competition, and that the financial sector should play a role in providing liquidity to groups with the potential to adapt and enhance their competitiveness, and should avoid extending liquidity to continuously loss-making companies (zombie firms).

The Secretariat clarified that the Bank of Thailand's targeted financial measures and commercial banks' assistance to borrowers are aimed at reaching potentially viable businesses and avoiding zombie firms. However, it was found that a group of borrowers received assistance multiple times, partly because assessing borrowers' potential and identifying zombie firms has become more difficult in a context where businesses face frequent and severe shocks.

Monetary policy considerations

Within the framework of monetary policy aimed at maintaining price stability while ensuring sustainable economic growth and preserving financial system stability, the Committee agreed that an accommodative monetary policy coupled with targeted monetary measures is helpful in supporting economic recovery. However, developments in inflation and medium-term inflation expectations must be monitored. Key issues were discussed as follows:

The upward trend in inflation is driven by supply-side factors (supply-driven inflation), with limited risk of a second-round effect. Medium-term inflation forecasts remain anchored within the target range. However, the price transmission by businesses in the context of high costs and medium-term inflation expectations need to be monitored.

The economy is projected to expand better than expected, but growth remains low and uneven. Although the Thai economy is receiving impetus from exports and investment, private consumption is expected to grow slowly due to slowing income trends and rising living costs. Furthermore, SMEs face obstacles in their recovery from intense competition.

Overall loan growth remained low, and SME loans continued to contract. Financial institutions remain cautious in lending to high-risk borrowers. Meanwhile, the Thai baht weakened in line with regional currencies, mainly due to the tightening monetary policy in the United States.

The committee believes that sustainable economic solutions require an integrated approach involving multiple policies. While a relaxed monetary policy combined with economic stimulus measures can help sustain the economy in the short term, looking ahead, policy should place greater emphasis on long-term economic restructuring to enhance potential and competitiveness.

Some committee members believed that the side effects of excessive and prolonged monetary and fiscal easing should be considered, such as the impact on the country's credit rating, reduced policy capacity, and the accumulation of vulnerabilities in the financial system from prolonged low interest rates.

The committee believes it is important to monitor and assess the financial risks of large corporations that are systemically important (SiCorps) and their systemic risk implications. Some committee members expressed concerns about SiCorps' current access to low-interest loans, which may reflect an underpricing of risks, leading to increased systemic risk in both concentration and interconnectedness dimensions. They also noted that policy interest rates should not remain too low for extended periods, as this could lead to the accumulation of risks to financial stability, fail to incentivize highly productive investment, and result in inefficient use of national resources (resource misallocation).

Monetary policy decisions

The Monetary Policy Committee unanimously (7 to 0) decided to maintain the policy interest rate at 1.00 percent per annum. The Committee deemed it appropriate to keep the policy interest rate unchanged at this meeting, noting that the accommodative monetary policy approach, coupled with targeted monetary measures, is contributing to economic recovery. However, it noted the need to monitor inflation developments and medium-term inflation expectations.

Looking ahead, the Committee views the current interest rate as appropriate to support economic recovery. While inflation is rising due to supply-side factors, the Committee needs to monitor future inflation trends and risks, particularly the price transmission of funds to businesses in the context of persistently high costs, as well as medium-term inflation forecasts and the debt repayment capacity of SMEs and vulnerable households.

refer : www.bot.or.th

Read all economic news throughout Thailand here.