The central bank yesterday unexpectedly lowered key interest rates by 0.125 percentage points for the first time since October 2004 in an attempt to spur economic growth after inflation decelerated last month and amid expectations of further easing in the fourth quarter.
Central bank Governor Perng Fai-nan (彭淮南) said the bank decided to reduce the discount rate, the rate on accommodations with collateral and the rate on accommodations without collateral by 12.5 basis points each to 3.5 percent, 3.875 percent and 5.75 percent respectively.
“The rate cut will have a positive impact on the economy that is overshadowed by the global economic downturn and financial turmoil,” Perng said after the quarterly board meeting.
The policy takes effect today.
Perng, who said three months ago that the central bank’s main task was to fight inflation, said it is devoted to stabilizing local financial markets and helping boost the economy.
“The [financial and economic] landscape at home and abroad has undergone radical change in the last three months,” the top monetary regulator said. “The central bank had to adopt measures accordingly.”
Perng said easy monetary policy is desirable now that international oil and raw material prices have come down from their previous peaks. He backed up that contention with the statistics bureau’s forecast that put inflation at 2.5 percent for the fourth quarter and 1.91 percent next year.
The gap between headline interest and inflation rates will taper off as the inflationary pressures lessen, said Perng, who reiterated his dislike for negative growth in real interest rates.
In addition to the rate cuts, the central bank also expanded the scope of Repo operations, which refer to commercial banks’ loans from the central bank. Eligible counterparties include banks, bills finance companies, securities firms and insurance companies.
The term of the repurchase facility is set within 180 days to provide market access to longer-term liquidity, Perng said, stressing that no domestic financial institutions have reported any strain.
“The instrument is a preventive design in case any institutes are in need later,” he said.
Yesterday’s interest rate cut came as a surprise to the market, as pundits had expected the central bank would remain neutral on its monetary policy.
Chen Miao (陳淼), a researcher at the Taiwan Institute of Economic Research (台經院), said the central bank should keep rates unchanged as inflationary pressures remain a concern.
“Raw material costs are still high,” Chen said. “That explains why the nation posted trade deficits for two straight months. The government should continue to curb inflation.”
Kevin Hsiao (蕭正義), head of UBS Wealth Management Research in Taiwan, said the central bank’s rate cut was intended to help bolster the nation’s export growth, the mainstay of the nation’s GDP growth.
Economists and government statistics officials have predicted that exports would slow for the rest of the year and the first half of next year.
“With lower interest rates, the local currency is set to weaken against the US dollar, which will make exports more competitive,” Hsiao said.
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