Sat, Jul 14, 2012 - Page 13 News List

Central bank cuts interbank loan rate

SAFE INTEREST:The move was meant to offset the effects of slow global growth by raising financial liquidity, but analysts said it did not mean interest rates would be next

By Amy Su  /  Staff Reporter

Taiwan’s central bank drove the overnight interbank call-loan rate down to 0.48 percent yesterday, from 0.506 percent a day earlier, prompting speculation that the monetary policymakers might cut key interest rates earlier than expected.

However, economists said the central bank’s move did not indicate it would revise downward policy interest rates in the second half of this year, as Taiwan’s interest rates have been at a relatively low level compared with other countries that have cut their key rates recently.

A central bank official at the department of issuing confirmed the bank allowed the drop in the overnight interbank call-loan rate — the price paid for one-day loans among banks that define the short end of the yield curve.

It is the first time the rate has fallen under 0.5 percent since April 23, central bank data showed.

“The central bank’s move was in response to weaker-than-expected global economic momentum, which has made various major global central banks revise their policy interest rates downward,” The Chung-Hua Institution for Economic Research (中華經濟研究院) president Wu Chung-shu (吳中書) said by telephone.

A lower overnight interbank call-loan rate will drag down short-term financing costs for banks, which may further lower domestic firms’ financing costs and raise the market’s liquidity.

However, Wu said he does not see the move as a hint that the bank will cut its policy interest rates in the near future, as current interest rates are low.

Cheng Cheng-mount (鄭貞茂), chief economist at Citigroup in Taipei, shared Wu’s views.

“The central bank’s move has already been enough to deal with the current economic conditions in Taiwan,” Cheng said by telephone.

Even if the central bank revises downward the policy interest rates in the second half, Cheng said it would have a limited effect in driving people and firms to borrow money from the banks.

Therefore, the bank’s strategy to use open-market operations, such as lowering the overnight interbank call-loan rate, will be more appropriate in reflecting its concerns over the economy’s future, Cheng said.

The central bank had gradually raised the overnight interbank call-loan rate since April on concerns over the rising inflationary pressure led by the government’s decision to hike fuel and electricity prices.

However, because the government changed its plan to raise the rates in three stages instead of all at once, easing the upside risk of inflation, the central bank may further lower the rate to increase financial market liquidity and help maintain economic momentum, Cheng added.

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