Taiwan's central bank cuts interest rates to stimulate demand

Taiwan's central bank on Thursday cut its benchmark interest rate for the first time since 2009, as the trade-reliant economy faces headwinds from a slowdown in China and weaker global demand for its tech exports. Central bank Governor Perng Fai-nan said current monetary policy was "loose" and hoped the rate cut would boost demand by lowering borrowing costs for corporations and consumers.
"We hope the rate cut can stimulate demand," Perng told a news conference, adding "our monetary policy won't be felt in the real economy that quickly." The China-led global slowdown has hit Taiwan's manufacturing sector while recent financial market volatility has crimped consumption, putting a damper on economic growth this year.
"By this symbolic rate cut, the CBC formally declares to enter a monetary easing cycle," ANZ said in a research report, referring to Taiwan's central bank, noting future rate decisions may detach from the trend set by the US Federal Reserve. "This potential change of paradigm may be driven by an increasing influence of China and the volatility of RMB on Taiwan's economy and the financial market," ANZ said. The central bank cut the discount rate by 12.5 basis points to 1.75 percent on Thursday. The rate had been kept at 1.875 percent since the last hike in 2011.
Taiwan's government recently slashed its 2015 GDP forecast to 1.56 percent, its slowest pace in six years, from 3.28 percent as a contraction in exports deepened. Some economists do not see Thursday's cut marking the start of more easing. "We doubt today's cut marks the beginning of a prolonged easing cycle," Capital Economics said in a research report.
It noted that while Taiwan had been wrestling with deflation since January, it was largely due to lower energy costs. Further easing should not be expected as inflation will pick up in coming months and the government will want to avoid triggering a rebound in house prices which have started to cool. Before the rate announcement, the Taiwan dollar hit fresh closing lows against the US dollar not seen in nearly six and a half years.