Despite a consensus on growing downside risks to the economy following last week’s unexpected cuts in interest rates, economists are divided over whether the cuts represented a temporary response or a shift in the central bank’s monetary policy.
Standard Chartered Bank said the central bank’s decision to lower the discount rate by 12.5 basis points to 3.5 percent on Friday — just one week after it reduced reserve requirements for banks — put an end to the central bank’s four years of tight monetary policy because of widespread concern that the economic slowdown could deepen.
Assuming that inflation pressure continues to subside in the medium-term, Standard Chartered predicted in a report released on Friday that the central bank would opt for three consecutive rate cuts of 12.5 basis points in December, March and June, bringing the discount rate to 3.125 percent.
Standard Chartered economists Tony Phoo (符銘財) and Nicholas Kwan (關家明) said in the report that the rate cut aimed to boost market confidence after the US financial crisis took its toll on local equity prices.
The local stock market has slumped 30 percent since the beginning of the year, weakening public confidence in President Ma Ying-jeou’s (馬英九) government, which vowed to make the economy a top priority if elected.
“The unexpected move, in our view, clearly reflects increasing concern among policymakers that the current bouts of global liquidity and the credit crunch could potentially impact Taiwan’s economy,” they wrote.
Sherman Chan (陳穎嘉), an economist at Moody’s Economy.com, was skeptical about whether the rate cut would have the desired effect. She said, however, that the central bank had clearly abandoned its trend of monetary tightening, albeit much sooner than expected.
“Although the modest 12.5 basis point interest rate cut this [last] week may do little to boost the economy, it is a clear indication that the Taiwanese authorities are now concerned about growth,” Chan wrote in a report on Friday.
Most other central banks in the Asia-Pacific region are expected to gravitate toward a neutral stance or loosen monetary policy, as inflation across the region should decelerate in the fourth quarter, the Sydney-based economist said.
Considering sluggish domestic demand and the unpromising global outlook, Citigroup said in a report on Friday that the domestic economy may slow further in the second half of the year, but said the current downturn would be “shallow but protracted” and last week’s cut could be temporary.
Cheng Cheng-mount (鄭貞茂) and Tina Liao, two Citigroup economists who coauthored the Citi Investment Research report distributed to clients, said the central bank’s latest rate cut was meant to “preemptively stabilize domestic financial markets,” adding that any future rate cuts would be contingent on the development of the global financial situation.
“Looking ahead, we think the central bank will likely take a neutral stance on monetary policy and stay put for a couple of quarters,” they wrote. “Nonetheless, we think current policy rates are still accommodative and policymakers will likely go back to tightening [monetary policy] once the economy shows more signs of recovery in 2009.”
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