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Lehman, Deutsche Bank see no shift in interest rates

Lehman Brothers and Deutsche Bank have predicted the central bank will leave benchmark interest rates unchanged tomorrow, given low inflation and rising uncertainty over global economic growth.

"With low inflation and high global uncertainty, Taiwan's central bank has likely dropped its tightening bias," Lehman Brothers said in its weekly economic report released yesterday.

"We expect Taiwan's central bank to stay on hold in September after hiking by a more than expected 25 basis points to 3.125 percent in the previous meeting," the US investment bank said.

That hike was the 12th interest rate increase the central bank has imposed since October 2004 to stem the inflationary threat. It was twice as large as the 0.125 percentage points in previous hikes.

This time, the central bank is expected to leave its benchmark interest rate unchanged. The market expects the bank will make its move depending on what the US Federal Reserve would do when it met yesterday. Most analysts expect a rate cut.

Deutsche Bank said the central bank would leave its rates unchanged because of a concern that the nation's growth momentum will ease due to weak exports, the German bank said in a report released on Monday.

Taiwan's economy expanded 5.07 percent in the second quarter from a year earlier, beating market predictions, with private investment growing 12.5 percent in the second quarter in particular, the Directorate General of Budget, Accounting and Statistics (DGBAS) reported on Aug. 23.

While the agency predicted a 4.58 percent growth in the economy for the year, the turmoil on the global financial market could undermine this recovery, Deutsche Bank said.

Lehman Brothers kept its prediction of 4.2 percent growth for this year and 5 percent for next year, while Deutsche Bank forecast 4.2 percent growth this year and revised its forecast for next year from 4 percent to 3.6 percent.

With credit crunch worries in the world's major economies that undercut a recovery in the global tech sector, "weaker than expected exports could derail a recovery of [Taiwan's] domestic demand," Deutsche Bank said.

"Meanwhile, mainland GDP growth is expected to weaken by at least 100 basis points in 2008 from 2007 in response to monetary tightening and administrative measures to curb asset price and CPI inflation pointing to weaker growth in [Taiwan's] exports of steel, chemical and petrochemical products," it said in the report

Deutsche Bank warned further consolidation in financial markets would likely mean weaker private consumption growth.
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