The central bank is likely to cut interest rates next week to stimulate the economy, although its benefits would be limited, as Taiwan does not suffer from a credit crunch, foreign financial institutes said.
“The central bank is poised for further rate cuts this month and in June when GDP readings might stay in negative territory due to feeble external demand,” Standard Chartered Bank’s Taipei-based economist Tony Phoo (符銘財) told a news conference.
Exports drive 70 percent of the nation’s GDP and poor export data thus far bode ill for the economy, which has slipped into a mild recession in the past two quarters and might not recover until the second half of this year, he said.
The languid state merits monetary easing that might help spur private investment, although the market is already swamped with funds due to an extended period of low borrowing costs, Phoo said.
Phoo said he expects the bank to lower the benchmark rediscount rate by 12.5 basis points to 1.5 percent from 1.625 percent.
Central bank Governor Perng Fei-nan (彭淮南) told lawmakers last week that he would respect board members on the issue and that a rate cut would help curb hot money inflows.
Foreign investors have raised net holdings in local shares by NT$74.03 billion (US$2.25 billion) so far this month as the European Central Bank’s new quantitative easing is driving global funds to emerging markets. Position increase amounted to NT$4.5 billion yesterday even though the TAIEX shed 1.56 percent to 8611.18, Taiwan Stock Exchange data showed.
The benign inflationary pressure lends support for rate cuts, Phoo said, adding that the headline consumer price index (CPI) registered a 2.4 percent increase last month, but core CPI climbed only 0.82 percent after stripping fruit, vegetable and oil prices.
A widening negative output gap would support a rate cut next week and beyond, Credit Suisse Group AG said.
The central bank have attributed the last two rate cuts to concerns over the deteriorating output gap, or differences between actual GDP figures and the nation’s growth potential.
Credit Suisse expects the output gap to reach 0.5 percent this year and ease slightly to 0.4 percent next year, suggesting lingering weak demand and a supply glut.
Disappointing exports in January and last month lend support to the gloomy forecast in which GDP would decline faster this quarter from the pace of 0.52 percent last quarter, the Swiss bank said.
Deutsche Bank voiced similar views, saying the central bank would embark on continued monetary easing with Taiwan stuck in recession.
A rate cut of 12.5 basis points would be in order next week as the central bank has distaste for drastic moves, the German lender said.
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