- Benchmark discount rate lowered 12.5 basis points to 1.75%
- Dovish tone of statement suggests more cuts to come: SocGen
Taiwan lowered its policy rate for the first time since the global financial crisis, sending forwards on the island’s currency to a six-year low.
The central bank cut the benchmark discount rate by 12.5 basis points to 1.75 percent, it said in a statement in Taipei on Thursday. Eleven of 24 economists surveyed by Bloomberg predicted a cut, while the remaining 13 had expected the rate to be held for the 17th straight quarter.
Taiwan’s economy is slowing as its technology exports are weighed by increased competition from China, where growth is also moderating. The island’s expansion rate for the third quarter will be lower and inflation is subdued, central bank Governor Perng Fai-nan said at a press briefing after the rate decision was announced.
The move, which comes ahead of an anticipated rate increase from the U.S. Federal Reserve, may not be the last, economists said after the decision.
The central bank is entering “a monetary easing cycle,” Raymond Yeung and Louis Lam, analysts at Australia & New Zealand Banking Group Ltd., wrote in a note. Future interest rate decisions “may detach from the implicit anchor of U.S. Fed policy,” they wrote.
The dovish tone of the central bank’s statement, in particular comments on the domestic economy, indicate a high chance for further cuts, said Claire Huang, Hong Kong-based economist at Societe Generale SA. The weak outlook on Taiwan’s growth and inflation suggests another reduction in borrowing costs is likely in December, said Andy Ji, a Singapore-based currency strategist at Commonwealth Bank of Australia.
One-month non-deliverable forwards on Taiwan’s dollar declined as much as 1.3 percent to NT$33.368 versus the greenback, the weakest level since April 2009, data compiled by Bloomberg show. The spot rate, which dropped 1.8 percent in the last three days, closed little changed at NT$33.26 in Taipei on Thursday before the rate decision was announced.
Taiwan slashed its 2015 forecast last month as growth slowed in its biggest market China and the local currency’s outperformance hurt competitiveness. The central bank already took a step toward easing in August, lowering the overnight rate for the first time in three years as local equities slid and China unexpectedly devalued its currency.
Speculation of a rate cut mounted as the island’s economic outlook deteriorated. In June, only two of 26 economists polled by Bloomberg expected a reduction in 2015, with three seeing a hike. Expectations for steady policy had helped make Taiwan’s dollar among the best performing emerging-market currencies this year as central banks from China to India all eased cash supply.
Like the rest of Asia, Taiwan is suffering from weaker exports and growth with the only surprise being that the central bank hadn’t cut before today, said Gareth Leather at Capital Economics Ltd. in London.
"It’s Taiwan playing catch up," he said. "We think the bulk of easing in Asian countries is over now, by the end of the year we will see a pick up in inflation."
Expectations that the Fed will tighten policy in coming months likely wasn’t a factor in Taiwan’s decision given the nation’s low foreign currency debt and healthy current account surplus, Leather said.
"Taiwan doesn’t dance to the Fed’s tune in the same the way that others might do," he said.