Photographer: Sam Yeh/AFP via Getty Images

Taiwan Cuts Key Rate in Fed Defiance as Export Slump Deepens

  • Central bank lowered benchmark discount rate to 1.625%
  • Policy makers said external demand unlikely to improve in 2016

Taiwan cut its policy rate for a second straight quarter, marking a divergence from the U.S., as a contraction in exports shows no signs of a recovery.

The central bank lowered the benchmark discount rate by another 12.5 basis points to 1.625 percent, it said in a statement in Taipei on Thursday. Twelve of 25 economists surveyed by Bloomberg had predicted a cut, while the remainder had expected the rate to be held after it was reduced for the first time since 2009 in September.

Policy makers cited an expanding negative output gap and mild inflation expectations in their statement. External demand is unlikely to improve next year, and slower economic growth has affected inflation, the central bank said in the statement, adding that the global economic outlook faces downside risks.

Exports dropped the most since 2009 last month, signaling the dim prospects of a recovery from a 10-month slump, as economic growth in the biggest market China slows. With domestic consumption also cooling, the economy shrank for the first time in six years last quarter.

Unlike most emerging markets, the island, with the world’s fifth-largest foreign-exchange reserves and a steady trade surplus, isn’t too worried about the risks of excessive outflows that come with parting ways with the Fed. Instead, policy makers’ concern is the Taiwan dollar’s strength, which is weighing on competitiveness.

"The correlation with U.S. growth cycle has weakened in recent years and policy decoupling has taken place," DBS Group Holdings Ltd. analysts wrote in a recent note. "The output gap will remain deeply negative and the outlook for recovery is elusive. Additional policy stimulus is needed to stabilize the short-term cycle."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE