UBS Economics-APAC Economic Perspectives _BoT The easing hat trick_ Lim-116001196

ab17 June 2025Global ResearchAPAC Economic PerspectivesBoT: The easing hat trickWhile a close call, we now expect a cut at the June BoT meetingBoT has cut rates three times in the last four meetings. While acknowledging that BoT's typical pace of easing suggests a pause on 25 June, we change our call to a 25bp cut on five reasons. First, the policy rate is still well above historical Taylor rule estimates, partly reflecting its higher peak starting level. Second, broader financial conditions remain tight. There is barely any loan growth, constrained by borrowers' risk considerations affecting lenders' willingness to extend credit against the backdrop of a weak economy. Third, further deterioration of high-frequency data e.g. tourist arrivals and sentiment indicators augur poorly for growth going forward. Fourth, the counterargument that BoT has limited policy space is not new, and was not the deciding factor during past easing episodes. In 2019, BoT cut the policy rate from 1.75% to 1.25%, albeit the decision was not unanimous as some MPC members opted to preserve policy space. Fifth, given the possibility of tariff hikes above 10% and product specific tariffs after the 90-day pause, a pre-emptive easing would mitigate elevated downside risks. Below trend growth in '25/26, q/q momentum to decelerate sharply in H2 Q2 growth will likely come in positive on a sequential basis, but remain below trend (UBSe: 0.3% q/q sa). While rising manufacturing production and better-than-expected agricultural harvests should support value added from the production perspective, this will be offset to a large extent by sharply falling tourist arrivals, which tend to have a large negative spillover drag on domestic consumption. Falling food prices also pose a drag on farm incomes, despite ample harvests. In the second half of 2025, slowing external demand and exports payback post front-loading likely outweighs a modest improvement in tourism and government fiscal disbursement. Deteriorating sentiment will translate to weaker consumption, especially of big ticket items such as autos. Accordingly, we forecast q/q growth to slow to slightly below zero in H2 2025. BoT appears to have a similar cautious view on growth momentum. Its 2025 reference growth forecast of 2% implies q/q sa growth averaging 0.1% for Q2-Q4.Weaker potential growth implies a lower neutral, terminal rateThailand's potential growth is likely to be lower compared to the high 2%s over 2015-19. This has been acknowledged in BoT's recent communications. Notably, growth averaged only 2.2% in 2022-24, even with a post-pandemic rebound and tourism recovery. Structural headwinds include: (1) Manufacturing underperformance might persist for a while, amid Thailand's concentration in slower-growth sectors such as ICE vehicles and hard disk drives. (2) A prolonged period of high US import tariffs will weigh on exports, given Thailand's large trade surplus vis-à-vis the US and depend