While the US Federal Reserve left its federal fund rates unchanged at the moment, Citigroup said the unexpected announcement by Taiwan’s central bank on Tuesday that it would lower its reserve requirement ratios for local lenders would likely create an opportunity for a “symbolic cut in the discount rate” next week.
The latest move would also cause short-term interest rates for the central bank’s negotiable certificates of deposit to go down, Citigroup economists Cheng Cheng-mount (鄭貞茂) and Tina Liao said in a client note released yesterday.
The central bank’s move on Tuesday night came as a surprise because the cut was not only a major move but also came a week before the monetary policymaker’s quarterly board meeting scheduled for Sept. 25.
By lowering the reserve ratios, the central bank would help inject NT$200 billion (US$6.2 billion) of liquidity into the nation’s monetary system amid a sharp decline in local equity prices and global financial turmoil.
Beginning today, the bank will lower the ratios for time deposits and time savings deposits by 0.75 percentage points to 4 percent and 5 percent respectively. The bank will also cut ratios for check deposits, demand deposits and demand savings deposits by 1.25 percentage points to 10.75 percent, 9.775 percent and 5.5 percent respectively.
“We think a rate cut next week would be a signal of the CBC’s determination to stabilize financial markets to prevent further economic downside risks,” Cheng and Liao wrote in the note.
“But this does not necessarily mean that the CBC has shifted its monetary policy to a neutral stance. Going forward, as we anticipate a shallow but protracted economic downturn, we expect the CBC to stay put in the coming months,” the note said.
The central bank has hiked its discount rate 16 consecutive quarters since October 2004 to help rein in inflationary pressure.
Ernest Lee, a bond trader at Mega Securities Co (兆豐證券), told Bloomberg Newswire yesterday that the central bank could elect not to lower interest rates this month, after central bank Governor Perng Fai-nan (彭淮南) said on Tuesday that the nation’s “real interest rates aren’t very high.”
“Judging from Governor Perng’s comments, the chance of the central bank lowering interest rates is slim,” Bloomberg quoted Lee as saying.
Meanwhile, market observers expected the cut in requirement ratios to indirectly channel fresh funds into the stock market, which has seen its TAIEX declined more than 30 percent since the beginning of this year to reach the lowest level in nearly three years.
But Tine Olsen, a Sydney-based economist at Moody’s Economy.com, maintained a skeptical view and said it was too early to judge the effectiveness of this increased liquidity, she said in a statement.
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