Taiwan will probably trim key interest rates to sustain growth after the US Federal Reserve cut borrowing costs, economists said yesterday.
The Fed moved the federal funds rate from its already low 1.75 percent, where it had stood for 11 months, to 1.25 percent, surprising many analysts who had forecast a quarter-point move.
They believed the Fed would want to conserve its power to aid the economy, given the bank's aggressive cuts last year that left it with little room to lower rates.
Taiwan's central bank may cut its key rediscount rate by a quarter percentage point before its scheduled quarterly policy meeting next month, according to a Bloomberg News survey.
All eight economists surveyed said they expect the Central Bank of China to cut interest rates by at least a quarter point from 1.875 percent. One economist forecast a half-point cut.
Taiwan's central bank matched each of the Fed's 11 rate cuts last year.
The expected rate cut would be the 14th since December 2000.
The Central Bank of China left its key rediscount rate unchanged at 1.875 percent, a record low, on Sept. 23, after its most recent quarterly policy meeting.
The Fed's Open Market Committee lowered its benchmark rate a larger-than-expected half percentage point to 1.25 percent, the lowest since 1961.
But analysts said the Fed apparently has grown so concerned about the weakening economy that it decided on bold action. In recent weeks, economic reports have shown unemployment rising to 5.7 percent, the manufacturing sector stumbling further and consumer confidence hitting a nine-year low.
"The Fed wanted to inject an element of surprise in an effort to boost financial markets and in that way lower risks from a wobbly economy and a possible war with Iraq," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.
The Fed also returned to a neutral policy stance -- indicating that economic risks were equally balanced between inflation and weak growth. In August and September, the Fed's statement was weighted more toward economic weakness.
Some analysts said they believed this switch was meant to signal the half-point cut would be the only one this year. Other economists said they thought a further reduction could come at policymakers' meeting either in December or January.
"If things improve and a possible war with Iraq recedes, then they may not have to cut rates again. But my guess is that we will get another quarter-point move in January," said David Wyss, chief economist at Standard & Poor's in New York.
The rate cut came on a 12-0 vote of the central bank's policy setting Federal Open Market Committee.
In a one-page statement explaining Wednesday's move, the Fed said it believed recent signs of a faltering economy demanded further action.
"Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment," the Fed said.
In an optimistic note, the statement said, "Today's additional monetary easing should prove helpful as the economy works its way through this current soft spot."
Analysts said the rate cut will likely help sales of big-ticket items such as autos and homes. Sales of new and existing homes were already headed for record levels this year as mortgage rates have hovered at or just below 6 percent for much of this year, the lowest level since the mid-1960s.
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