Interest rates should remain level, researcher says

To sustain economic growth, which started showing signs of slowing in the second quarter of this year, the central bank might not raise benchmark interest rates next week, despite expectations that the US Federal Reserve may further hike its rates, a researcher at the Taiwan Institute of Economic Research (TIER, 台經院) said yesterday.

"The result of GDP growth for the second quarter has not been revealed, but market watchers are speculating that the figure will be the lowest for the year," said Yang Chia-yen (楊家彥), an associate research fellow at TIER.

"I think with this scenario, as well as stable consumer prices that pose no threat to inflation, the central bank may keep the benchmark interest rates at their current level," Yang said.

According to a survey released by TIER yesterday, the gloomy second quarter last month dragged local manufacturers' confidence in the economy to its lowest point since July 2001.

The manufacturing-climate index last month continued to slide to 92.34 from 96.6 in April, the lowest level in the past four years, the survey showed.

"Sagging production, prices and margins are to blame, as well as inventories that can barely be reduced," Yang's fellow TIER researcher Chen Miao (陳淼) said yesterday.

Although foreign orders rose 13.14 percent last month from the same period last year, industrial production declined by 1.42 percent from the previous month, while manufacturing production dropped 1.4 percent, according to government statistics that were released on Thursday.

Chen explained the phenomenon by saying that while companies accepted orders in Taiwan, actual production was taking place in China.

Declining exports resulted in the government and analysts lowering their GDP forecasts for the year, with the most pessimistic prediction of 3 percent issued by UBS Securities Asia Ltd last week.

The negative sentiment is expected to gradually dissolve over the next few months, the survey said, citing a recovery in the US economy, as well as the continued economic boom in China.

The number of manufacturers that were pessimistic about the economy dropped from 29.4 percent to 20 percent, while those who were optimistic fell from 22.1 percent to 21.3 percent.

The TIER survey found that the business climate indicator for the service sector rose to 115.57 last month from 114.5 in April, showing that service providers were more positive than manufacturers about the economy, supported by stable consumer prices and a vigorous job market, Chen said.