Thailand's central bank said it will hold its policy rate at 1% for as long as possible to support growth even as oil prices push inflation higher. Governor Vitai Ratanakorn told reporters higher fuel costs from the Middle East conflict will lift inflation, but the Bank of Thailand will avoid hiking rates because such moves wouldn't tame the supply-driven price shock. The BOT has slashed borrowing costs by 150 basis points since late 2024, including a surprise 25 basis-point reduction in February to reach 1%. The next policy meeting is scheduled. This pause comes as the government flags targeted measures to help households cope with rising living costs.

Decision and rationale

The Bank of Thailand decided to keep its key interest rate at 1% and signalled a lengthy pause. Governor Vitai Ratanakorn said inflation will ‘‘definitely accelerate with oil price hikes and supply disruptions.’’ He added the bank will ‘‘refrain from raising the interest rate as long as possible because higher interest rate won't dampen inflation.’’

The central bank made that call while citing the nature of the shock. Officials see the inflation rise as external and cost-push. Those forces come from higher global fuel costs tied to the Middle East conflict. Because the price pressure stems from supply and trade channels, monetary tightening would risk weakening domestic demand without cutting world oil prices.

Policy path so far

The monetary easing cycle began in late 2024. Since then the BOT has trimmed borrowing costs by a total of 150 basis points. In February the monetary policy committee cut the key rate by 25 basis points to 1%. That move took the rate to its lowest level since September 2022, according to central bank statements.

Governor Vitai and other officials have repeatedly said they will ‘‘look through’’ a temporary spike in headline inflation driven by energy. Headline inflation had been negative for about a year before recent price moves. The bank now projects headline inflation will return to its 1% to 3% target range this year, and earlier than a prior forecast that put that return in the second half of 2027.

How the shock is hitting the economy

The economy is import-dependent for energy. That makes it vulnerable to oil-price swings. Prime Minister Anutin Charnvirakul told parliament the new government will prioritise measures to ease the economic hit from the conflict.

He said the administration will help millions cope with rising living costs.

Fuel prices have already moved sharply. The government recently raised retail diesel prices by about 70% over recent weeks. That increase is feeding through to headline inflation. Central bank officials and outside economists warn about second-round effects, including higher transport and production costs.

Mastheads

Vitai offered a range for growth outcomes tied to the war. He said Thailand's expansion this year could slow to around 1.7% if the conflict is resolved quickly. That would be down from a prior projection of 1.9% before the war. If tensions persist until June, he said growth could ease further to about 1.3%.

Measures beyond rates

United Overseas Bank economists Enrico Tanuwidjaja and Sathit Talaengsatya argued the BOT is likely to rely on targeted measures rather than a broad rate move to respond to the 2026 energy shock. They wrote the bank will favour a look-through strategy supported by targeted debt relief, targeted credit support, and close monitoring of second-round effects.

That approach aims to protect borrowers and specific sectors without tightening policy across the whole economy. The bank has said it will focus on macroeconomic and financial stability while watching inflation dynamics closely.

Markets showed a muted response to the central bank's messaging.

The baht was broadly steady after the governor's comments, though it headed for a small decline of roughly 0.3% at one stage. Thailand's benchmark stock index pared gains to around 0.1% in afternoon trading on the day of the comments.

Investors are weighing the trade-off between higher energy costs and the central bank's commitment to a prolonged pause. On one hand, rising fuel prices push inflation and corporate costs higher. On the other, a low policy rate supports borrowing and demand during a growth slowdown.

Households face immediate pressure from higher diesel and transport costs. Businesses with large fuel bills or imported inputs will see margins squeezed. Borrowers benefit from low interest rates, but savers earn less on deposits.

The government is stepping in with relief measures. That shifts some of the burden away from monetary policy and onto fiscal and targeted credit measures. The BOT's stance limits policy tightening that would raise borrowing costs for households and firms.

The central bank's strategy depends on the shock staying external and temporary. If inflationary pressures broaden beyond energy and trigger sustained wage-price loops, the policy calculus would change. For now the BOT judges core inflation remains low and the growth impulse is externally supported rather than broad-based domestic demand.

The scale of the diesel price rise and continued global trade tensions increase the risk of second-round effects. The bank has said it will monitor those channels closely and stand ready to act to preserve financial stability.

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The next Bank of Thailand policy meeting is scheduled.

This article was created with AI assistance.