The worsening outbreak has hit economic activity, which is heavily reliant on tourism. Stricter containment measures imposed in July have been extended with lockdown areas expanded, though increased exports and fiscal measures have lent some support.
The Bank of Thailand (BOT) said after a policy meeting that it was again downgrading its growth forecast for this year to 0.7% from 1.8% predicted in June, and now expects just 150,000 foreign tourists.
For 2022, it cut its growth outlook to 3.7% from 3.9%.
"The Thai economy in 2021 would be affected by the COVID-19 outbreak more than expected with significant downside risks," the BOT said in a statement.
Controlling the outbreak and relaxing virus curbs, if done by early in the fourth quarter, will help the economy from contracting this year, it said.
Under a 'baseline minus' scenario, the economy will be sharply slower than the baseline forecast this year, the BOT said, adding in that case the outbreak is prolonged and the restrictions are eased at the end of the year.
The BOT's monetary policy committee voted 4-2 to hold the one-day repurchase rate at 0.50% for a 10th straight meeting. The two dissenters voted for a quarter point cut to help support the economy.
It was the first split decision since a rate cut in May 2020. One member was absent.
All 18 economists in a Reuters poll had expected the BOT to stay on hold after three rate reductions in 2020.
"Given the deteriorating outlook and the BOT's willingness to consider further easing, we are now pencilling in one more 25 basis point rate cut" this year, Capital Economics said in a note.
Kobsidthi Silpachai, head of capital markets research of Kasikornbank, said the split decision was "a bit of a surprise".
"We think that a cut in the policy rate would be sense if it was better coordinated with fiscal policy. If not, it would become an exercise of pushing on a string".
The BOT said fiscal and financial measures must be expedited to assist affected groups in a more targeted and timely manner.
The government plans to borrow 500 billion baht ($15 billion) to ease the outbreak impact and recently approved about 100 billion baht in relief measures.
The BOT said monetary policy will remain accommodative to support the economy. Most committee members felt the rate was already low and felt financial measures would be more effective in helping activity than cutting the key rate.
It also said it would closely monitor the baht and ensure it would be no obstacle to businesses. The baht is down 9.4% against the dollar so far this year.
The latest outbreak started in April and has accounted for most of total cases and deaths since the start of the pandemic early last year. It came as Thailand prepared to reopen more broadly to foreign visitors later this year to revive its devastated tourism sector.
The central bank also flagged vaccination developments as a major risk. Only 6.2% of Thailand's more than 66 million population have been fully vaccinated, according to the country's COVID task force.
Thailand on Wednesday reported 20,200 new coronavirus cases and 188 additional deaths, both the highest daily increases so far during the pandemic.
($1 = 33.09 baht)
(Reporting by Orathai Sriring, Kitiphong Thaichareon and Satawasin StaporncharnchaiEditing by Kim Coghill)
By Orathai Sriring and Kitiphong Thaichareon