Mon, Sep 26, 2011 - Page 1 News List

Central bank’s discount rate not expected to budge

By Amy Su  /  Staff Reporter

The central bank is expected to hold the nation’s policy rate at 1.875 percent at its board meeting on Thursday, given that Taiwan’s downside risks on economic growth led by recent global uncertainties have outweighed inflationary pressures, economists said.

This would be the first time that the bank has held the policy rate in more than a year after increasing it for the past five straight quarters, bringing Taiwan’s discount rate from 1.25 percent to 1.875 percent.

“It is less likely that the central bank will raise the rates for now, as relatively mild inflation and rising economic uncertainties have lowered the necessity of a rate hike,” National Taiwan University finance professor Shen Chung-hua (沈中華) said by telephone yesterday.

Although a low interest rate may hurt local banks’ profits by squeezing the spread between their lending rates and the central bank’s benchmark rates, the debt crisis in the US and Europe may make the central bank suspend the pace of rate increases, Shen added.

Wu Chung-shu (吳中書), president of the Chung-Hua Institution for Economic Research (中華經濟研究院), shared Shen’s view.

“I see no need for the central bank to raise the policy rates again amid the nation’s slowing economic growth and lowering inflationary pressure,” Wu said at a conference on Friday.

Economists at Standard Chartered Bank and Citigroup also expected the central bank to keep policy rates unchanged.

Tony Phoo (符銘財), a Taipei-based economist at Standard Chartered Bank, said the weaker-than-expected industrial output data, alongside poor export orders and rising concerns about the global economic outlook, have intensified because recent market turmoil may have undermined market confidence.

“These add to further support that the central bank will consider putting on hold its modest tightening stance when it meets next week,” Phoo said in a note on Friday.

Cheng Cheng-mount (鄭貞茂), chief economist at Citigroup in Taipei, reiterated that an interest rate cut for Taiwan would be too early to call, because economic growth only appears to be shifting gear from an above-trend to a trend growth, and not to recession status yet.

However, Barclays Capital maintained its forecast that the central bank would raise the policy rate by 12.5 basis points, saying the impending launch of Apple Inc’s newest iPhone, coupled with the emergence of the seasonal pre-Christmas sales lift, could boost orders down the electronics value chain.

However, the brokerage house revised downward its forecast for the central bank’s increase on rates of 90-day negotiable certificates of deposit (NCD) amid the recent re-appraisal of economic growth.

“We look for a smaller 3 to 4 basis points pass-through into 90-day NCD rates, from 8 to 9 basis points estimated before,” Barclays said.

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