Taiwan Holds Policy Rate for Longest Period as Growth Slows

Taiwan held interest rates for an eighth meeting after the government cut its growth forecast for the year and as China’s cash squeeze hurts the outlook.

The central bank kept the discount rate on 10-day loans to banks at 1.875 percent, it said in a statement in Taipei today, as predicted by all 19 economists in a Bloomberg survey. The monetary authority has refrained from adjusting borrowing costs since June 2011, the longest period of inaction, its data showed.

A cash squeeze in China, the island’s biggest trading partner, has led to market sell-offs in Asia and threatens to slow the region’s expansion. Taiwan’s statistics bureau last month cut the gross domestic product forecast for this year to 2.4 percent from 3.59 percent, and President Ma Ying-jeou has unveiled measures to boost economic growth.

“Low inflation and sluggish growth continue to prompt the central bank to remain accommodative,” said Raymond Yeung, a Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd. “The central bank is also watching closely the highly uncertain financial markets,” and will continue to act prudentially and maintain a stable policy stance.

Global funds have sold almost $4 billion of Taiwanese stocks this month. The Taiex index closed 1.3 percent higher today before the announcement. The Taiwan dollar has slipped about 3.5 percent this year against its U.S. counterpart.

President Ma, whose disapproval rating is at its highest since he took office in May 2008, has sought closer trade and investment ties with China to bolster the island’s economy. He said last month he’ll let the island’s insurers invest in infrastructure projects and create a NT$1 billion ($33 million) fund to channel money to companies.

Biggest Squeeze

China and Taiwan will begin currency-swap negotiations this year, the island’s monetary authority said today. China’s biggest squeeze on credit in at least a decade limits mainland companies’ financing abilities, fueling concern a further slowdown will drag Taiwan’s economic growth.

“The Fed’s potential scale-back of bond buying and China’s liquidity problems affect the prospects of global economic growth,” Central bank Governor Perng Fai-nan said. “Keeping interest rates unchanged will ensure a stable economic recovery and inflation outlook.”

Taiwan’s economy grew 1.67 percent in the three months through March from a year earlier, after expanding 3.97 percent in the fourth quarter. Consumer prices rose 0.74 percent in May from a year earlier, the slowest pace since February 2012.

Modest Inflation

Exports, which make up about 60 percent of the island’s gross domestic product, slipped in two of five months this year. HTC Corp., the Taiwanese smartphone maker which posted a record-low profit last quarter, said its revenue fell 3.4 percent in May from a year earlier.

Perng, who was re-appointed to a fourth term in February, said in a statement inflation has been “modest,” and measures to cool property prices have seen results. While stagnant wage growth and food-safety issues have damped private consumption, the economy will be better in the third quarter from the preceding period, it said.

Perng has imposed selective credit controls on luxury housing since June last year, with mortgages capped at 60 percent of the value of the property in Taipei and New Taipei city for values of over NT$80 million, and NT$50 million in other parts of Taiwan.

“Weak economic growth and low inflation mean that rate hikes anytime soon are out of the question,” said Gareth Leather, a London-based Asia economist at Capital Economics Ltd. “Interest rates will remain unchanged until at least the end of the year, although there remains an outside chance of a rate cut if the economy continues to weaken.”

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