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Central bank follows global rate cut

The central bank yesterday lowered key interest rates for the second time in two weeks, taking cues from its counterparts in the US, Europe and other Asian countries in a joint attempt to rein in the effects of the global credit crisis that are hurting Taiwanese exports.

In an unscheduled press conference early yesterday morning, central bank Governor Perng Fai-nan (彭淮南) said the bank’s board decided to reduce the discount rate, the rate on accommodations with collateral and the rate on accommodations without collateral by 25 basis points each to 3.5 percent, 3.875 percent and 5.75 percent respectively, effective immediately.

EXPORT DROP

“With the nation’s exports declining and the international financial turmoil escalating, the board reached a decision [to cut interest rates] to help spur domestic demand and economic growth,” Perng said. “There is no liquidity strain at home, though.”

The rate cut came one day after six central banks, including the US Federal Reserve and the European Central Bank, adopted the same measure in a concerted effort to restore confidence in the world’s financial system.

The move also follows last month’s drop in Taiwanese exports — the first decline in six-and-a-half years.

Perng said the rate cut would not fan inflationary pressures as consumer price growth had slowed for two straight months and was expected to head further down for the rest of the year.

Stocks rose on news of the rate cut but lost steam as foreign capital continued to pull out of the domestic financial market.

The TAIEX closed 78.69 points, or 1.45 percent, lower at 5,130.71. Turnover was NT$74.82 billion (US$2.3 billion), with net selling by foreign institutional investors reaching NT$2.29 billion, Taiwan Stock Exchange data showed.

Analysts painted the rate cut as a positive gesture to financial markets but voiced skepticism about its effectiveness in lifting the economy.

Cheng Cheng-mount (鄭貞茂), chief economist at Citigroup Inc Taiwan, said the rate cut fell in line with the moves taken by monetary authorities around the world even though financial markets here have ample liquidity.

‘FRIENDLY’ MOVE

“The markets will interpret the rate adjustment as friendly,” Cheng said. “But what they really lack is confidence, not more liquidity. That explains why the local bourse failed to give a favorable response.”

The national savings rate is expected to reach 30.6 percent next year, while the excess savings rate will hit NT$1.3 trillion, a ratio of 9.5 percent to GDP, meaning there are huge idle funds, government statistics showed.

Kevin Hsiao (蕭正義), head of UBS Wealth Management Research in Taiwan, agreed.

Hsiao said the equity market would remain volatile as long as the credit crunch continues to grip Wall Street and other major international bourses.

“The rate cut can definitely boost investor confidence and exports,” Hsiao said by telephone. “But the root of the problem lies with the global financial unrest over which [Taiwanese] authorities have no influence.”

Cheng and Hsiao said the central bank will further lower interest rates later this year if other central banks do so first.

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