Rate cut talk growing in Thailand

Piti A Sahakorn | LightRocket | Getty Images

Growing signs that political limbo in Thailand is taking a toll on the economy raises pressure on the Bank of Thailand (BOT) to pull the rate-cut trigger as soon as its next meeting, analysts say.

Thailand's central bank resisted the urge to lower interest rates at its last meeting in January – contrary to expectations for monetary easing against a backdrop of political turmoil that has harmed tourism and investor confidence.

(Read more: Thailand cuts 2014 growth forecast to 3-4%)

Data on Monday showing the Thai economy, the second biggest in Southeast Asia, grew 2.9 percent last year compared with a 6.5 percent rise in 2012 may sway the BOT when it next meets on March 12.

"A rate cut next month remains a distinct possibility for two reasons," said Vishnu Varathan, a market economist at Mizuho Corporate Bank in Singapore. "The GDP (gross domestic product) data was disappointing and forward-looking indicators are also weak, so from a monetary policy perspective it makes sense to front load that rate cut."

See Thai growth at 3% this year: Maybank

Underscoring the weak outlook, Thailand's planning agency on Monday cut its 2014 economic growth forecast to a range of 3 to 4 percent from 4 to 5 percent amid a delay in public investments and weakness in private consumption.

The BOT's key interest rate is at 2.25 percent and analysts at HSBC forecast two more 25 basis point rate cuts that would take rates to 1.75 percent by the end of the first half of this year.

"Despite beating consensus expectations, the breakdown of the fourth quarter GDP data unsurprisingly reveals that heightened political tensions during the quarter resulted in a clear deterioration in domestic activity, particularly within the business sector," they said in a note on Monday.

(Read more: Thai riot police retake protest sites in Bangkok)

"Although the BOT has limited ammunition – it has already eased policy by 125 basis points since November 2011, and the high level of household debt remains an issue – we believe these bullets will eventually be used to shore up the economy," they added.

Elections held earlier this month have failed to restore political stability to Thailand, which has been hit by anti-government protests for months now. The gridlock is expected to delay large government spending plans. A controversial rice subsidy meanwhile faces funding issues.

"The (GDP) number was better than the consensus, but it is below 3 percent and that's not a good number in my view," Mayree Chowvikran, an investment strategist at Maybank Kim Eng Securities, told CNBC on Monday. "We have to monitor the political situation."

(Read more: Thailand's politics remaina mire, so why are its shares up?)

Tim Condon, head of research for ING Financial Markets, added that while Thai assets have rallied since the February 2 election, the relief is likely to be "transitory." He expects a 25 basis point rate cut at the March BOT meeting or the April one.

In contrast, OCBC Bank said that while the political crisis in Thailand posed downside risks to the economy, a rate cut at the March meeting was unlikely.

"We recognize that the crisis is dominantly a political one, and a rate cut is unlikely to boost economic growth and market sentiment via the traditional channels," it said in a note.

Writing by CNBC's Dhara Ranasinghe. Follow her on Twitter at @DharaCNBC