Thailand on Wednesday cut its benchmark interest rate by 0.25 percentage points, the first reduction in seven months, after the domestic economy contracted in the first quarter of the year.

Sluggish economic growth in China, the United States and the European Union is weighing on the Thai economy, the central bank said as it reduced its policy rate to 2.50 per cent.

"Exports are likely to face downside risks because of slow growth in China while inflationary pressure has eased," the Bank of Thailand said in a statement.

The Bank had faced pressure from the government and the business community to lower interest rates to slow capital inflows and help weaken the Thai baht, whose rise has made Thai exports less competitive.

Thailand's economy shrank 2.2 per cent in the three months to March from the previous quarter -- the first contraction in more than a year -- as manufacturing output fell, official data showed last week.

On a year-on-year basis, GDP growth slowed to 5.3 per cent.

The unexpectedly weak performance followed a strong year-long recovery from devastating floods in late 2011 that hit major factories and caused a double-digit drop in gross domestic product (GDP).

Policymakers expect the Thai economy to bounce back from the latest weak patch and "expand throughout the year due to sound economic fundamentals", the central bank said.

Analysts said the central bank was likely to keep the current policy in the coming months to see how the economy performs.

"The Bank will maintain the policy rate at 2.5 per cent throughout the second half of this year and take a wait-and-see attitude," said Usara Wilaipich, senior economist at Standard Chartered Bank.

channelnewsasia.com