Taiwan Rate Cut in ’15 Goes From No Chance to Likely for Traders

Taiwan’s slowest economic growth since 2012 has propelled the possibility of an interest-rate cut from zero to likely in the space of a month, according to bond traders.

Nine of 15 surveyed this week by Bloomberg forecast the central bank will reduce the policy rate by 12.5 basis points to 1.75 percent by the end of 2015. A July poll had all 40 predicting a hold. The number of economists forecasting such a move is now eight of 21, compared with two out of 26 in June.

Taiwan has kept its benchmark rate unchanged since 2011, a policy that’s helped make its currency the most resilient in emerging markets this year as more than 25 economies including China and South Korea lowered borrowing costs. Prospects for a cut are building after second-quarter economic growth missed all 20 estimates in a Bloomberg survey and China, the island’s largest trading partner, devalued the yuan.

“Taiwan is already behind other economies,” said Kevin Chan, a fixed-income trader at Sinopac Securities Corp. in Taipei. “With GDP growth slowing and low inflation, the central bank may be forced to pro-actively cut rates.”

Taiwan’s economy expanded 0.52 percent in the second quarter, the least since 2012, as overseas shipments shrank. The island’s exporters have been grappling with a slowdown in China, tougher competition from regional rivals and currency strength.

The central bank took a step toward easing last week, cutting the overnight guiding rate over five days and relaxing some mortgage controls as home-price gains showed signs of a halt. The 10-year sovereign bond yield was 1.18 percent on Wednesday, near a record-low 1.12 percent reached in 2012.

Currency Decline

While the Taiwan dollar’s depreciation is more moderate than declines elsewhere in Asia, the currency is poised for its biggest quarterly loss since 2011 and fell to a six-year low of NT$32.670 versus the greenback on Wednesday.

For some economists, cutting the policy rate of 1.875 percent -- already near a record 1.25 percent -- isn’t the answer to the island’s woes.

“They’ve achieved their target, that is lower the market rate, by lowering the overnight guidance rate,” said Claire Huang, a Hong Kong-based economist at Societe Generale AG. “The central bank understands that Taiwan’s export competitiveness is more of a structural problem; devaluing the currency won’t help much in the medium term.”

Swap traders also raised bets on monetary easing. One-year interest-rate swaps, the fixed payment to receive the floating rate, fell four basis points this month to 0.85 percent, below the underlying three-month interbank offered rate called Taibor, which was 0.87 percent. The five-year government bond yield dropped 11 basis points in August to 0.815 percent, near a record low of 0.725 percent.

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