Thu, Feb 19, 2009 - Page 12 News List

Economists see further rate cuts ahead

LIQUIDITY While most economists agreed there was still room to cut rates, they said this could have a limited effect and urged the central bank to consider other options

By Crystal Hsu, Lisa Wang and Jerry Lin  /  STAFF REPORTERS

Economists said that the central bank still had room to cut interest rates to boost the nation’s economy, despite its announcement of a reduction of 0.25 percentage points yesterday in the wake of worse-than-expected fourth-quarter growth figures.

“The central bank may be forced to cut interest rates [further] to cushion the negative impact from current bleak GDP forecasts,” Cheng Cheng-mount (鄭貞茂), Citigroup Inc’s chief economist based in Taiwan, said by telephone.


Cheng believed the central bank would pare down the discount rate by another 0.25 percentage points to 1 percent during its quarterly meeting next month.

“But as there is already more than sufficient liquidity in the money market, the central bank may find that its ability to influence the economy through monetary policy is waning,” he said.

Cheng’s comments came after the Directorate General of Budget, Accounting and Statistics (DGBAS) reported yesterday that the economy contracted a record 8.36 percent in the three months ending Dec. 31 from a year earlier.

The DGBAS also forecast the economy would shrink 2.97 percent this year, revising down its previous estimate of a growth of 2.12 percent made in November.

Bureau Director Tsai Hung-kun (蔡鴻坤) said that GDP could contract by an even sharper 5.74 percent this year in the absence of government stimulus measures.

The DGBAS said the consumer voucher program launched on Jan. 18 could raise GDP by 0.66 percentage points, while other economic stimulus measures could contribute another 2.6 percentage points — although their impact still remains to be seen.

Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院), said the central bank still had room to cut the discount rate to 1 percent.

However, unless the unemployment rate worsens or imports and exports further deteriorate, Liang said the central bank would likely leave interest rates at current levels until its board meeting next month.


Wu Tsai-yi (吳再益), a director at the Taiwan Research Institute (台灣綜合研究院), however, said the government should not rely on interest rate cuts alone to shore up the nation’s export-dependent economy.

He said there was not much room left for further rate reductions and it was unlikely Taiwan would move toward zero interest rates.

“Instead, the government should look to exchange rate changes and allow the local currency to depreciate moderately,” Wu said by telephone yesterday.

He forecast a continued slide in the New Taiwan dollar to around NT$35 against the greenback.

Most economists thought the DGBAS was overly optimistic with its GDP forecast, after witnessing a 44.1 percent and 56.6 percent fall in exports and imports respectively last month.

Wu warned that the economic impact of falling exports would be far less than that of domestic consumption and investment, which account for 60 percent to 65 percent and 15 percent to 18 percent respectively of the nation’s GDP.

As a result, the government needs to increase its spending in order to boost consumption, he said.

Even so, Hu Chung-ying (胡仲英), deputy chairman of the Council for Economic Planning and Development, said yesterday evening that the government’s economic policy planner would stick to its goal of achieving 2.5 percent growth for this year.


Hu acknowledged it was time for the nation to adjust its industrial policy and reduce its reliance on exports to the US, the epicenter of the financial market turmoil and ensuing economic woes.

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