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Central bank moves to cut deposit reserve ratios

The central bank announced late last night that it would slash required reserve ratios for local lenders to help stabilize the domestic financial market after the TAIEX tumbled another 295.85 points, or 4.9 percent, to close at 5,756.59, the lowest in nearly three years.

Central bank Governor Perng Fai-nan (彭淮南) said that the bank’s board reached the decision to cut the reserve ratios on passbook savings by 1.25 percentage points and that on time deposits by 0.75 points, beginning tomorrow, to inject liquidity into the capital markets.

“The adjustment will undo the rate hikes [announced on June 26 and which took effect on July 1],” Perng said. “It is intended to reflect falling inflationary pressures and ease concerns about an economic recession.”

The central bank’s move is expected to restore some NT$200 billion (US$6.23 billion) it took out from the financial markets following its monetary tightening three months ago.

Perng, who said in June that his prime task was to fight inflation, remained tight-lipped about interest rates except to reiterate that the bank would address the issue at its board meeting next Thursday.

Domestic interest rates remain relatively low compared with other Asian countries, the bank said.

Earlier in the day, the central bank pumped US$3.59 billion into the foreign-currency interbank market to defuse worries about a liquidity strain, as the Lehman Brothers’ financial woes dragged down the local bourse for the second consecutive day.

The benchmark TAIEX has shed 554 points, or 8.9 percent, this week. Some dealers forecast a short, one-day rally today, but added that a solid recovery appeared unlikely in light of the thin trading.

Alan Tseng (曾炎裕), an analyst at Capital Securities Corp (群益證券), said a rebound was likely today, but acknowledged that it was hard to predict whether the market had hit the bottom or when it would regain its upward momentum.

“Wall Street’s performance and other factors may have influenced [the local bourse] to a certain degree, but no one knows how long the impact will last,” Tseng said in a telephone interview.

Tseng said that trading volume was a better indicator of a potential recovery, adding that daily turnover must exceed NT$100 billion to achieve a sustainable rally.

Turnover was NT$82.43 billion yesterday. It has fluctuated between NT$60 billion and NT$85 billion in the last two months.

Winson Wang (王榮旭), an analyst at Marbo Securities Consultant Co (萬寶證券投顧), said the TAIEX had a fair chance of gaining ground today if the Fed decided to cut interest rates at its board meeting yesterday.

Wang said Taiwan’s monetary policymakers should also lower key interest rates next week to help restore investor confidence.

“A rate cut will help reduce mortgage loan costs,” Wang said by telephone.

“The central bank must not make further interest hikes, if it considers a downward adjustment undesirable,” he said.
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