Fri, Feb 02, 2001 - Page 17 News List

Analysts applaud interest rate cut

MONETARY POLICY With exports likely to post their first-ever contraction since the Asian financial crisis, the rate reduction comes just in time, according to analysts

By Tsering Namgyal  /  STAFF REPORTER

Analysts hailed an interest rate cut by the central bank yesterday -- and expect more aggressive monetary easing ahead in light of an anticipated economic slowdown.

"We are expecting a total of a 50 basis point rate cut this year in Taiwan," said Paul Alapat, a regional economist for Nomura International (野村國際) yesterday.

Anticipation of an interest rate cut in the US, which was delivered on Wednesday, has led many in Taiwan to expect the central bank to follow with its own reduction.

The central bank yesterday lowered the rediscount rate to 4.37 percent from 4.62 percent following a special meeting of board members; the move signals a shift to a more vibrant monetary policy.

"Given the fact that money supply growth was slower than expected last year and bank lending and private investment are slowing, the central bank decided to cut rates," the bank said in a statement. "Looking ahead, Taiwan's exporters will not see significant growth."

Analysts say the rate cut comes just in time, as there's an economic storm brewing on the horizon.

"I think it is the right move," said Dong Tao, senior economist with Credit Suisse First Boston in Hong Kong.

Credit Suisse expects Taiwan exports to contract in the first quarter -- which would be the first decline since 1998 -- when exports fell by 9 percent due to the Asian financial crisis.

But the fate of Taiwan's economy may depend on how the US responds to its series of recent rate cuts.

"This is a transformation mechanism for Asia" given the Taiwan's dependence on US demand, Alapat said.

And lower interest rates may not hurt the New Taiwan dollar much as long as the cuts help bolster investor confidence.

"It is more a matter of confidence rather than interest rate differential," Dong said. He was referring to the fact that lower interest rates, in theory, weaken the currency.

The central bank therefore should move "more aggressively" given the potential cyclical slowdown, he said.

The central bank should let the NT dollar depreciate to stimulate exports while at the same time lowering interest rates to help push the economy forward, he said.

The recent strength in the NT dollar may be related to the huge inflow of foreign funds into Taiwan's stock market.

Qualified Foreign Institutional Investors (QFII) net bought NT$2.74 billion in stocks on the Taiwan Stock Exchange yesterday.

"This is all hedge-funds stir frying the stock market," said Andy Xie of Morgan Stanley.

Despite the speculation, the central bank yesterday scotched any assumption that the domestic rate cut was precipitated by Wednesday's rate cut in the US.

The bank had been "meditating" on this issue during the Chinese New Year holiday, said Lee Sheng-yen (李勝彥), director general of the central bank's Banking Department.

Thanks to the adequate liquidity in the banking system, the bank will not touch the reserve requirement ratio in the near term, he said. But most analysts believe that the central bank may slash key rates by another 25 basis points.

Morgan Stanley Dean Witter has calculated that Taiwan interest rates share nearly a 50 percent correlation with their US counterparts.

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