In a surprising move last week, the central bank rolled out several measures in an attempt to increase market liquidity and support local exporters. However, the bank might need to take further action if the nation’s economic situation continues to deteriorate.
First, the central bank has said it expects market rates to drop to their lowest levels in nearly four years, even though its policy interest rates have remained unchanged since July 2011.
For instance, the overnight interbank call-loan rate declined for four consecutive sessions last week to end at 0.377 percent on Friday, a move that is expected to lower short-term financing costs for banks, which might further reduce local businesses’ financing costs and raise the market’s liquidity. The overnight interbank rate dropped 1.1 basis points in the whole of last week and might continue a downward trend in the near term. The rate dropped 11.8 basis points in two weeks in July 2012 in response to a slowing domestic economy, according to Thomson Reuters data.
Second, the central bank has lowered interest rates on its daily offerings of certificates of deposit to increase the level of liquidity in the market. For example, interest rates on the bank’s 14-day certificates of deposit decreased by three basis points to 0.47 percent on Friday from the 0.5 percent paid for the previous issuance.
The decline in the money market rates prompted speculation that the bank might cut key interest rates earlier than expected, prompting the yield of 10-year government bonds to fall by 19 basis points last week to 1.204 percent, the largest weekly decline since August 2011, according to Bloomberg tallies.
Third, the central bank has shown its willingness for the New Taiwan dollar to remain weak, in a bid to spur economic growth.
Whether or not the bank intervened in the market to prop up the US dollar, the NT dollar depreciated by nearly 2 percent last week against the greenback, closing at a new five-year low of NT$32.368 on Friday, tracking the weakness of regional currencies, which were all triggered by China’s unexpected move to devalue the yuan.
Indeed, the downside risk for the local currency remains large, as long as a regional currency devaluation race continues and if the central bank intends to help strengthen Taiwanese exporters’ global competitiveness, especially after the government on Friday cut Taiwan’s GDP growth forecast to 1.56 percent for this year from its previous 3.28 percent growth forecast, citing lackluster export performance.
Last, the central bank has started to ease the regulations on financial institutions’ mortgage lending, on Thursday increasing the loan-to-value (LTV) ratio to 60 percent from 50 percent for luxury housing, property purchases by companies and institutions, and individual buyers’ third residential unit purchase. It also removed two of the 15 districts in New Taipei City and all four districts in Taoyuan from a list of “restricted areas” in which homebuyers can only borrow up to 60 percent of LTV.
While the latest property market deregulations are likely to have muted impact on luxury homes in prime areas of Taipei City, it is a significant policy shift, considering a series of hawkish policies the bank has introduced since 2010 to curb property prices. At the same time, the bank’s latest move might signal the beginning of a cycle of credit-easing measures, after the property market’s transactions shrank significantly in the first half of the year with the economy slowing faster than expected.
With the issue of slow economic growth expected to gain even more attention as the nation approaches the presidential and legislative elections in January next year, the central bank and other government agencies are under increasing pressure to provide bolder and more efficient policies.
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