Sethaput Suthiwartnarueput outlines the Bank of Thailand’s approach to managing interest rates, household debt, and financial innovation.

As Thailand works to accelerate its recovery from the pandemic, the role of its central bank has become even more critical. While the recovery has seen a boost from a resurgence in tourism, long-standing challenges such as high household debt continue to weigh on the economy, making monetary policy a crucial focus.

In October 2024, the Bank of Thailand (BOT) made an unexpected move by cutting its policy rate. This decision, which surprised many in the market, reignited debates over the country’s monetary strategy, especially amidst growing global uncertainty, including concerns about potential political shifts in the United States. The central bank’s governor, Sethaput Suthiwartnarueput, spoke with Caixin to explain the BOT’s strategy, which also includes initiatives to modernise Thailand’s financial sector through increased digital payments and a push for greener economic growth.

Suthiwartnarueput, a seasoned economist with a PhD from Yale University, has a wealth of experience in both domestic and international financial institutions, including the World Bank and McKinsey & Co. He previously held senior roles at the Stock Exchange of Thailand and the Ministry of Finance.

On the Interest Rate Cut
When asked about the rationale behind the October rate cut, Suthiwartnarueput explained that the BOT’s decisions are based on a comprehensive analysis of three key factors: growth, inflation, and financial stability. While both growth and inflation were on target, the governor emphasised concerns over financial stability, particularly in relation to Thailand’s rising household debt.

“We had anticipated that financial conditions were tightening, which led us to believe that the risks associated with further increasing debt were now lower,” he said. “That’s why we thought it was appropriate to recalibrate interest rates, while keeping a broadly neutral stance.”

Thailand’s Household Debt Challenge
Suthiwartnarueput acknowledged that household debt in Thailand remains a major issue, with debt levels at around 90% of GDP. He highlighted that prolonged periods of low interest rates led to an increase in borrowing, which accelerated during the pandemic. The BOT aims to reduce this debt through a balanced and gradual approach, avoiding overly aggressive measures that could harm economic growth.

“We need to reduce household debt, but it has to be done carefully. Sudden cuts could slow down the economy too much,” he said. To tackle this, the BOT is employing a variety of tools, including responsible lending guidelines, debt restructuring initiatives, and macroprudential measures.

A key component of the BOT’s efforts is ensuring that banks provide clear and accurate information to borrowers, helping them make informed decisions and avoid excessive borrowing.

Government Pressure on Interest Rates
Regarding pressure from the Thai government to lower interest rates in order to stimulate growth, Suthiwartnarueput stated that while this pressure exists, the BOT’s decisions are driven primarily by its inflation-targeting framework. “Government pressure has been ongoing, but our rate decisions are outlook-dependent, not data-dependent,” he explained. The BOT remains focused on long-term stability, adjusting rates based on the future outlook for growth, inflation, and financial stability.

Managing the Baht Amid Global Volatility
The Thai baht has experienced significant fluctuations in 2024, with periods of both sharp depreciation and sudden appreciation. Suthiwartnarueput noted that while the BOT allows for a managed floating exchange rate, it intervenes when necessary to prevent excessive volatility that is not supported by economic fundamentals. “We do interventions when movements are not underpinned by fundamentals or if there are issues with market functioning,” he added.

Political Stability and Economic Resilience
Although Thailand’s political environment has been unstable, Suthiwartnarueput believes that administrative stability, rather than political stability, is key to maintaining economic resilience. “Political volatility can create uncertainty, but administrative continuity—ensuring consistent execution of policies—is crucial for the economy,” he said. He also emphasised the importance of having sufficient macroeconomic buffers to withstand external shocks, such as global crises or changes in foreign policy.

The Role of Central Bank Digital Currencies (CBDCs)
When discussing the BOT’s involvement in the mBridge cross-border CBDC project, Suthiwartnarueput outlined the benefits of wholesale CBDCs in both domestic and international contexts. He pointed out that while retail CBDCs have uncertain advantages over existing systems like PromptPay, wholesale CBDCs hold significant promise for improving interbank settlements and cross-border transactions.

“We’re focused on wholesale CBDCs for cross-border payments. The mBridge project, for example, addresses the inefficiencies of correspondent banking, reducing settlement times and eliminating risks,” he explained.

For domestic payments, the BOT is focusing on enhancing digital infrastructure, including the expansion of the PromptPay system, which processes millions of transactions daily. The central bank is also exploring multilateral initiatives to connect Thailand’s digital payment system with other countries in the region.

Addressing Climate Risks in Financial Policy
Suthiwartnarueput also discussed the impact of climate change on Thailand’s economy, noting that sectors like agriculture, tourism, and infrastructure are particularly vulnerable. In response, the BOT has encouraged financial institutions to integrate climate risks into their decision-making processes, including through the development of a green taxonomy and climate stress tests for financial institutions.

In collaboration with major banks, the BOT has launched initiatives aimed at facilitating the transition to greener industries. One notable initiative, “Financing the Transition,” encourages banks to create financial products that help polluting industries reduce their carbon footprint, with the goal of ensuring a smooth and equitable shift towards sustainability.

“We’re not just focusing on going green; we want to help industries transition in a way that supports both environmental and economic sustainability,” Suthiwartnarueput concluded.