The central bank yesterday cut its policy rates by 12.5 basis points, citing concerns over the widening output gap, in an attempt to stimulate economic growth while maintaining stability in consumer prices and the financial markets.
It was the first rate change in 17 quarters and the first rate cut in six years. The move also came as the nation’s export-focused economy slows to its lowest level since the global financial crisis of 2008 and 2009.
“The widening output gap and negative headline inflationary readings warranted looser monetary policy,” said central bank Governor Perng Fai-nan (彭淮南), who told the legislature on Wednesday that the nation’s monetary environment was easy enough to support economic activity.
Photo: Liu Hsin-de, Taipei Times
The output gap is the difference between actual GDP and potential GDP, and a negative value arises when the growth of supply outpaces the growth of demand, signifying deflation.
The rediscount rate dropped to 1.75 percent, the collateralized loan rate to 2.125 percent and the unsecured loan rate to 4 percent following the decision by the bank’s board.
The headline consumer price index has stayed negative so far this year and it could grow mildly next year, lending support for a rate cut to ease deflationary pressures, Perng said.
Expectations of price falls, in particular, have constrained inventory build-up at firms as evidenced by the near double-digit decline in the wholesale price index, a measure of commercial production costs.
“The rate cut would help spur demand, even though the effect could be limited,” Perng said.
The policy move fuels worries that the economy might deteriorate this quarter and beyond after posting a 0.52 percent pickup last quarter, a sharp departure from the 3.84 percent growth seen in the first quarter.
This quarter might be the weakest economic showing this year, due to worse global headwinds and a high comparison base last year, Perng said.
Several research institutes have forecast a downturn for the economy this quarter in the light of unimpressive economic data.
The rate cut surprised several economists, who had expected the monetary policies of the central bank and the US Federal Reserve to converge.
“By this symbolic rate cut, the central bank has formally declared it is entering a monetary easing cycle,” Raymond Yeung (楊宇霆), a Hong Kong-based analysts for Australia and New Zealand Banking Group Ltd, said in a client note.
Future interest rate decisions could detach from the implicit anchor of the Fed’s policy as China now carries more importance on Taiwan’s economy, he said.
Tony Phoo (符銘財), Taipei-based economist at Standard Chartered Bank, said the unexpected move would be a one-off and that a weak currency is more effective in battling the slowdown caused by weak exports.
The New Taiwan dollar has softened 7.05 percent against the US currency so far this quarter, allowing exporters to book foreign-exchange gains, despite shrinking business.
Minister of Economic Affairs John Deng (鄧振中) yesterday welcomed the central bank’s move, calling the decision “very good” and “appropriate.”
“The rate cut suggests banks will ease lending costs, which will be beneficial to enterprises’ operations and to new investments. This will also help Taiwan’s export performance,” Deng said.
Heads of Ministry of Economic Affairs, Ministry of Finance and Council of Agriculture, among other government officials, are part of the central bank's board members.
Perng yesterday said all board members passed the rate cut in a unanimous vote.
Additional reporting by Lauly Li
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