Wed, Aug 22, 2007 - Page 12 News List

Analysts split on impact of credit woes

INTEREST RATES Lehman Brothers said the central bank would keep rates unchanged to aid GDP growth, but Citigroup said the bank would raise rates to fend off inflation

By Lisa Wang  /  STAFF REPORTER

As fears over the effect of the US' subprime mortgage problems continue to haunt global markets, focus has shifted to the central bank's likely action during its quarterly meeting next month, with analysts split on whether the bank is likely to raise or maintain current rates.

Lehman Brothers said yesterday that the central bank is likely to keep interest rates unchanged after its quarterly board meeting next month given a weakening economic growth outlook.

In its latest Taiwan report released yesterday, the US investment bank said the central bank may stop raising rates as global stock markets could tumble further amid concerns over the effect of the US' subprime mortgage problems.

The nation's GDP growth is facing greater downside risk now than three months ago, Lehman Brothers said, citing recent turbulence in global financial markets.

"Taiwan's economy will undergo a stress test, if the turbulence in global financial markets is prolonged. We now see more downside than upside risks to our 2007 and 2008 GDP growth forecast for Taiwan," Lehman Brothers economist Sun Mingchun (孫明春) said in the report. "And thus expect no more rate hikes this year."

Sun had earlier expected the central bank to hike key interest rates again next month. In June, the central bank raised the benchmark interest rate 0.25 percentage points for the 12th successive quarter, bringing the discount rate, or the interest rate charged to banks for borrowing short-term funds directly from the central bank, to 3.125 percent.

On the macroeconomic front, both private consumption and exports could weaken, Sun said in the report, saying consumers might curtail spending if unresolved subprime mortgage problems continued to weigh on stock markets and hurt investor confidence.

Taiwanese investors could also suffer losses on their overseas investments if global indices were to fall further, he said.

As of end of last year, Taiwanese investors held US$89 billion in offshore securities, and a 20 percent decline in global equities would imply an aggregate loss of US$18 billion, Lehman Brothers estimates.

Despite growing downside risk, Lehman Brothers retained its forecast for Taiwan's GDP growth for this year and next year at 4.2 percent and 5 percent respectively.

Citigroup, however, believed the US credit crunch would have a limited impact on the local economy.

"The US subprime loan problems will have very limited impact on the nation's economy as local firms will only be indirectly affected," Citigroup economist Cheng Cheng-mount (鄭貞茂) told the Taipei Times in a telephone interview yesterday.

Neither would the subprime impact be strong enough to hurt Taiwan's private consumption, which was rebounding from the slump on high credit card delinquency, Cheng said.

Moreover, Taiwanese exports, mainly electronic products, have shown signs of a strong recovery, he said.

"Taiwan has a different problem to deal with ... and that's inflationary risk," Cheng said.

To prevent the consumer price index from rising sharply, Cheng said the central bank was likely to raise the benchmark interest rate by another 0.125 percentage points next month.

Separately, central bank Governor Perng Fai-nan (彭淮南) said yesterday that the bank would stick to its policy of safeguarding the stability of consumer prices and domestic financial markets, as well as take into account public interest, according to a statement released by the bank late yesterday.

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