The central bank may soon be forced to cut interest rates to help bolster a sagging economy -- although they may not do it before the Chinese New Year, analysts say.
"We are looking for quite an aggressive rate cut now [from the central bank], given the slowdown in the exports and potentially much bigger decline in the US exports," said Dong Tao, regional economist for Credit Suisse First Boston.
Analysts say the sharper-than-expected slowdown in the US economy presents a major cause of concern for Taiwan's economy, although the central bank refuses to shrug off its conservative monetary stance.
The central bank is worried that any major rate cut may push the New Taiwan dollardown, thereby complicating the nation's prickly financial situation. "It is too conservative," says Dominic Lin (林東明), a fund manager with China Investment Trust Corp (中華投信).
But faced with falling exports, the central bank may have to balance its short-term currency concerns with the long-term need to boost the sagging economy.
Taiwan's exports are expected to grow by only 8 percent this year, after registering 22 percent growth last year.
Lower interest rates will not only help boost investment and consumption, but may also lead to a weaker currency, which is exactly what is needed at the moment, analysts say.
"The consensus estimate is that the bank will cut interest rates after the Chinese New Year," says Damian Gilhawley, economist at China Securities (
Most economists underscore the need to reflate the economy because it is quickly slowing down as US consumer demand wanes.
"A rate cut is needed," said CSFB's Dong Tao. "The economy is slowing at a sharper pace than officials realize."
Economists believe that the US Federal Reserve Board will cut interest rates again at the end of this month to stave off the effects of what is now widely seen as a drastic slowdown in the US economy.
Both central bank Governor Perng Fai-nan (
The latest rate cut in the US will help Taiwan, as it will narrow the interest rate differential between the two nations, Perng said, thus easing the downward pressure on the NT dollar.
Chen, the bank's new No. 2 man, said journalists that the bank has not "considered this option so far," adding that the government is concerned about the possible impact on the capital outflow and the liquidity of the bad debt-laden financial institutions.
But economists believe that a rate cut is imminent given the central bank's past record of mimicking rate trends in the US.
Gilhawley of China Securities is looking for at least 25 basis point reduction soon. "They might wait until the Chinese New Year," he said.
The central bank cut interest rates last month to head off an economic slowdown, reducing the rediscount rate to 4.625 percent from 4.75 percent.
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