Decline in interest rates abroad may cost central bank

The central bank's income may be hurt by falling global interest rates, central bank Governor Perng Fai-nan (彭淮南) said.

Foreign-currency of the central bank has fallen because of interest-rate cuts by the US Federal Reserve, Perng said in a report to be delivered to the legislative finance committee on Monday.

"The impact will be even bigger if the Fed continues to cut interest rates," Perng said.

The Fed has lowered rates 2 percentage points this year in an attempt to restore confidence to financial markets and avert a recession. Banks have booked US$195 billion in asset writedowns and credit losses since the start of last year, Bloomberg data indicate.

Taiwan's bank will probably earn NT$134.2 billion (US$4.4 billion) this year, compared with NT$231.9 billion last year, the report said.

Earnings the US have also been hurt as Taiwan's currency rose in response to the widening interest-rate differential with the US.

Taiwan's authority increased its benchmark interest rate by 0.125 percentage points to 3.375 percent in December, to help temper inflation. The US benchmark rate of 2.25 percent is now 1.125 percentage points lower than Taiwan's key rate.

"The strengthening Taiwan dollar means the value of the central bank's foreign-currency assets will drop in local currency terms," said Lucas Lee (李志安), an economist at Mega Securities Co (兆豐證券) in Taipei.

"The central bank will probably raise borrowing costs by 0.125 percentage points next week -- not more -- so the Taiwan dollar won't rise too fast," Lee said.

Policymakers on Thursday to discuss interest rates.

The NT dollar has gained about 6 percent against its US counterpart this year, the best performer among Asia's 10 most active currencies.