- Perng says rates unlikely at zero or negative in his term
- Economy shrank in past two quarters amid China's slowdown
Taiwan cut its benchmark rate for a third consecutive quarter as an export slump showed no signs of recovering and has begun weighing on the labor market, while Governor Perng Fai-nan said he doesn’t expect to take the rate to zero or even negative during his term.
The central bank lowered the benchmark discount rate by another 12.5 basis points to 1.5 percent, it said in a statement Thursday in Taipei. Twenty-five of 26 economists surveyed by Bloomberg had forecast a cut, with 22 expecting the rate to reach 1.5 percent, three predicting 1.375 percent and one expecting no change.
"Rate cuts can boost real demand, and in addition, help maintain financial stability," Perng said at a press conference. There’s still room for conventional monetary policy, and the economy will improve in the second half of this year from a low base, he said.
Taiwan’s economy is headed for a third consecutive quarter of contraction as shipments shrank in the past 13 months amid a slowdown in China. The strongest stock inflows in Asia this year are buoying the local dollar, threatening to put the island’s exporters at a disadvantage to rivals in South Korea. The weaker trade picture also is weighing on the labor market, raising the risk that consumption will cool further as well.
The inflation outlook is steady and the domestic outlook is poised to improve, albeit at a slow pace, the central bank said in the statement. Overseas inflows have been strong amid low rates abroad, and policy makers will maintain foreign-exchange market order in the event of excessive volatility, according to the statement. Taiwan also will ease rules on mortgages.
Asked how rate cuts can curb inflows when most foreigners are buying Taiwan stocks, Perng said investors are also buying bonds amid easing abroad, thus lower rates can boost real demand and curb inflows.
Taiwan’s currency has gained 0.8 percent this year, more than that of its main export competitor South Korea. The weighted average interest rate on new loans made by the five leading banks dropped to a four-year low of 1.593 percent in February.
The unemployment rate rose to 3.94 percent in February and has climbed steadily from a record low of 3.73 percent a year earlier. Youth unemployment is “stubbornly high” and there’s “substantial slack” in the labor market that may not be evident in the overall jobless rate, John Zhu, an economist at HSBC Holdings Plc in Hong Kong, wrote in a note.
Perng was appointed to a five-year term in 2013.