Fri, Jul 01, 2016 - Page 1 News List

Central bank cuts its policy rates on back of growth concerns

By Crystal Hsu  /  Staff reporter

Central bank Governor Perng Fai-nan, left, yesterday speaks during a news conference in Taipei.

Photo: Lo Pei-der, Taipei Times

The central bank yesterday cut its policy rates by 12.5 basis points for the fourth time in three quarters on concerns that growing uncertainty over the global economy might weigh on economic growth.

The latest rate cut came one week after the UK voted to leave the EU, a move that has jolted global financial markets with its economic spillover expected to persist in tandem with the exit process.

“A loose monetary policy is merited, because the increase in global uncertainty might impact the nation’s GDP showing,” central bank Governor Perng Fai-nan (彭淮南) told a news conference after a two-hour board meeting.

Starting today, the rediscount rate is to drop to 1.375 percent, the collateralized loan rate to 1.75 percent and the unsecured loan rate to 3.625 percent.

Mixed economic data prompted the rate cut, said Tony Phoo (符銘財), a Taipei-based economist at Standard Chartered Bank.

However, he added that the economy might have bottomed in the first quarter and started on a slow course of recovery in the second quarter, after the purchasing managers’ index, industrial output and leading economic indicator series registered positive cyclical movements in May.

While Taiwan’s exports to the UK accounted for a modest 1.4 percent of total exports last year, with the rest of the EU accounting for 7.1 percent, Perng said the EU is the US’ and China’s second-largest trading partner, suggesting an indirect spillover, although its magnitude is not clear yet.

Together, the US and China account for more than 50 percent of Taiwan’s exports, Ministry of Finance data showed.

The central bank would adopt macro-prudential measures, if necessary, to help maintain financial stability, but it would also require the government to implement fiscal expansion and structural reform to spur economic growth, Perng said.

South Korea, which relies heavily on exports, like Taiwan, has recorded better GDP growth because its government has introduced five stimulus packages during the past 12 months, Perng said.

Higher tax rates and lower debt allow the South Korean government to be more aggressive with its spending, he said.

In the absence of structural reform, Taiwan would suffer a long period of stagnation due to China’s economic rebalancing as that nation seeks to shift its growth driver from investment and exports to domestic consumption, he said.

“Consequently, China imports less from Taiwan, which in turn sees its exports declining,” Perng said, adding that the trend has constrained employment and wage growth in Taiwan.

Taiwan has emerged as the largest victim of China’s rebalancing, due to its heavy economic dependence, although all of China’s trading partners took a hit, except New Zealand, which has benefited from robust kiwifruit and milk sales, Perng said.

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