Fri, Mar 30, 2001 page17

• Interest rates cut by 0.125%

  CAUTIOUS CONCERN The central bank made the interest rate cut in light of the slowing economy and a rising unemployment rate to help boost domestic demand

  • By Tsering Namgyal / STAFF REPORTER
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  The nation's central bank yesterday cut interest rates for the fourth time since December to bolster the sagging economy -- and urged commercial banks not to cut credit lines to local companies.

  The bank cut the rate by 12.5 basis points in a move which signals cautious concern rather than outright panic over the slowing economy and the rising unemployment rate.

  "They want to make sure that the financial markets get an impression that the central bank wants stability over anything else," said Larry Duke, an economist at Citibank. "The central bank is pursuing a more gradual track."

  Economists also question if the lower interest rates will help boost domestic demand as local banks are turning cautious just as the local corporations are seeking credit. "It is not the cost, but access to credit, which matters," says an economist at a leading foreign bank.

  Indeed, the central bank has refused to cut interest rates as aggressively as the US Federal Reserve -- which slashed rates by a half percentage point last week.

  The central bank Governor Perng Fai-nan (彭懷南) meanwhile issued one of the strongest messages to local banks, urging them to extend credit or risk penalty. "The rate cut will make it easier for companies to borrow from banks," Perng told a press conference yesterday. "Banks are tightening lending as the economy slows. I urged banks to continue to extend credit to corporations."

  Taiwan's central bank, however, has remained adamant in its refusal to let the domestic currency weaken. But economists continue to engage in the classic academic debate over the pros and cons of the currency depreciation.

  Andy Xie, economist at Morgan Stanley Dean Witter, believes that given the export-oriented nature of the Taiwanese economy, lower interest rates may not help as long as the NT dollar continues to remain strong. "The NT dollar has remained relatively stronger compared to the Korean Won and the Japanese yen," said Andy Xie, an economist for Asia at Morgan-Stanley Dean Witter. "I don't think the stimulus will work without a depreciation in the exchange rate."

  Taiwan must let the NT dollar drop if it wants to maintain the competitiveness of its exports, which accounts for nearly 43 percent of its GDP, reckons Xie.

  Defying the regional trend, the NT dollar has gained nearly 1 percent against the US dollar so far this year, making it the world's second best performer, according to Bloomberg.

  But Citibank's Duke believes that the domestic central bank may be right in not letting the NT dollar weaken too much as it may render Taiwanese imports more expensive.

  "If the currency weakens too much, then it is negative for the terms of trade," he said. Taiwan imports nearly 23 percent of its total imports from Japan, which explains why the NT dollar's exchange rate roughly mimics the Japanese yen.

  Analysts said the relative strength in the domestic stock market has also given domestic regulators more breathing space.
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