Pundits say lower local rates likely

Faced with a sharply slowing economy, Taiwan's central bank may move aggressively to slash its own interest rates following a surprise rate cut in the US on Wednesday, economists said.

"Chances for a rate cut [in Taiwan] have increased," said Paul Alapat, chief regional economist for Nomura International. "It could happen anytime now."

Most economists have lamented that the characteristic conservatism at the central bank is doing more harm than good to the economy.

"What surprises me is that the central bank is so stubborn in keeping interest rates at this level," said Craig Chan, regional economist for ING Barings.

While the central bank has lowered interest rates by 62.5 basis points in four cuts since December, the degree of the revision is seen as insufficient. But as the domestic economy continues to slow, that may change.

Analysts, however, differ on the degree of needed rate cuts. Dong Tao, regional economist for Credit Suisse First Boston, expects the central bank to drop rates by "one fourth or an eighth" of a percent.

But Nomura's Alapat expects the central bank to "move by 25 basis points this time" -- double the usual 12.5 basis points.

Countries such as Thailand, South Korea and the Philippines will also follow with their own rate cuts in a month or so, Tao said.

Economists said that the central bank's concerns that lower interest rates may hurt the currency may be misplaced because the "interest rate differential" is only one of the many factors that determine the exchange rate.

"If the economy improves and the demand picks up, capital inflows will help the currency" Chan said.

But the jury is still out over whether a rate cut will help when demand for goods and services is collapsing.

The consensus, nonetheless, holds that the future of Taiwan's technology sector will depend on demand for information-technology-related products from the US, as well as demand from China.

The US and China account for 23 percent and 24 percent of Taiwan's total exports, respectively.

Exports, which generally drive around 45 percent of the GDP, is only expected to grow by 5 percent this year, one of Taiwan's worst performances in nearly a decade.

While it may take some time for rate cuts to help the economy, it may help to improve sentiment in the near term.

Citibank economist Larry Duke said, "It provides a more positive backdrop for Taiwan."

Indeed, Wednesday's US rate cut sent stocks on Wall Street soaring. The NASDAQ composite index, which is loaded with technology stocks, recorded its fourth-largest gain in percentage terms, soaring 156.22 points, or 8.1 percent, to close at 2,079.44. The Dow Jones industrial average climbed 399.10 points, or 3.9 percent, to 10,615.83.

Thanks to Wall Street's rise, the Taiwan stock market yesterday also jumped, closing 99 points higher, or 1.81 percent, to close at 5,608.5.