Taiwan's central bank is widely expected to follow in the footsteps of the US Federal Reserve, which cut interest rates overnight, by announcing a 12.5-basis-point rate cut in the coming days, local observers indicated yesterday. However, some played down the real effect of the rate cut on improving the credit squeeze facing some companies, saying the move may come more to placate market expectations.
"The central bank will surely be pressured to cut interest rates, but mostly to answer to market expectations. The cut will be really limited, most likely by 12.5 basis points," said Chuang Ming-Shu, deputy head of research at Taiwan Securities Corp (
The central bank last announced a 12.5-basis-point rate cut on April 20, which took effect the following day. Another rate cut would be the fifth one announced this year.
Currently, the central bank's discount and accommodation rates are at 4 percent and 4.375 percent, respectively.
Despite the rate cuts in recent months, the market continues to worry about a possible credit crunch, where corporate fund demand cannot be met due to cautious lending by banks.
Local banks generally have ample funds on hand, but have been rather cautious in credit extension as they fight to cut their overdue loans. While the central bank has been resorting to various measures to encourage banks to extend credit more aggressively, little improvement has been seen.
Nonetheless, some believe that while the real effect of a rate cut may be doubtful, Taiwan's weakening economy seems to justify further rate cuts.
"The central bank will still likely cut interest rates to lend its support to the economy. The rate cut should take place by next week at the latest, as the upcoming release of first quarter GDP growth will likely be quite depressing," said Mark Lin, economist at Barits Investment Services.
A money market dealer at a local bills finance company agreed, saying that before the economy starts showing signs of bottoming out, the central bank will still need to cut rates to lend support.
In addition, observers believe that the central bank may also adjust downward its required bank reserve ratios to spice up sentiment.
Barits' Lin said that while in the short term, a cut in interest rates and bank reserve ratios may not be a direct cure to the country's credit situation, the positive effects of the moves could be seen when the economy starts picking up again later this year.
"Once the economy revives, demand will rebound. By then, the low interest rates and flush funds will be there to serve their needs," Lin said.
In a move that could have more of a political tint, Lin pointed out that a cut in bank reserve ratios could be adopted as a measure to try and boost confidence in the government on the upcoming one-year anniversary of assuming office.
Meanwhile, the money market dealer explained that the central bank could cut bank reserve ratios and immediately issue large amounts of central bank paper to absorb the excess funds released as a result. Banks would then see more income on interest due to the central bank paper they hold, and as a result, may become more active in extending loans, the dealer said.
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