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The Bank of Thailand (BOT) voted unanimously to keep its policy interest rate unchanged at a near four-year low of 1.00% at its April 29 meeting. We maintain our view that the BOT will remain in an extended pause through end-2026, as the economy faces stagflationary dynamics stemming from supply-driven inflation acceleration and weaker economic growth due to disruptions in Strait of Hormuz linked to the Middle East conflict. Policymakers view the inflation shock as temporary and assess the current monetary policy stance as appropriate to support the-still fragile economy. Interest rate adjustments in either direction could pose risks to growth or inflation, particularly given the highly uncertain outlook.
Thailand’s headline inflation is poised to accelerate in 2026, driven by higher global energy prices, increased food inflation, and some cost pass-through. We expect annual average headline inflation in 2026 to return to the BOT’s 1-3% target range for the first time since 2023, and are raising our 2026 forecast to 2.5% (from 0.5%). The BOT has also increased its 2026 headline inflation projection substantially to 2.9% - near the ceiling of its target range – but expects it to ease to 1.5% in 2027. It anticipates supply-side pressures to moderate gradually in 2027 amid limited persistent cost pass-through due to weak demand, while medium-term inflation expectations remain anchored. Economic growth will likely be negatively affected by spillovers from the Iran war, partially cushioned by goods exports benefitting from global artificial intelligence-related tailwinds. Our 2026 growth assessment and forecast of 1.6% is broadly aligned with the BOT’s projection of 1.5%. Rising costs and uncertainty will weigh on private consumption and business investment amid weaker corporate profitability. Foreign tourism will be dampened by higher airfares and disruptions to Middle East and European travel. We estimate that these markets account for ~27% of total visitor arrivals, the highest share among ASEAN-6. While the currency has weakened since the onset of the Iran war, policymakers are likely to view this as a relief to small and medium-sized exporters and tourism players, which previously faced headwinds from a strong baht. Overall, we expect the BOT to be cautious in adjusting interest rates in the coming months, unless growth steps down sharply or inflation pressures broadens in a manner that threatens medium-term inflation expectations.
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