Taiwan Seen Approaching Zero-Rate World With Mystery Benchmark

  • Market attention turns to how low 0.2% overnight rate can go
  • Central bank forecast to cut policy rate to 1.5% on Thursday

Cyclists cross a road near stores along Yongkang Street in Taipei.

Photographer: Lam Yik Fei/Bloomberg

Taiwan’s interest rates are much closer to zero than you’d think.

While the central bank is forecast by economists to cut its benchmark to 1.5 percent Thursday, what really matters is how it adjusts an overnight money-market rate policy makers don’t make public. The rate on one-day certificates of deposit, which the authority communicates confidentially to banks, is said to have been lowered 19 basis points to 0.2 percent since the current easing cycle began in August.

With the overnight rate approaching zero, the Central Bank of the Republic of China (Taiwan) is running out of room to revive a shrinking economy. Though the overnight mark usually moves in conjunction with the policy rate following quarterly reviews, the island’s monetary authority can influence borrowing costs between meetings by adjusting it daily. While Europe and Japan have adopted negative interest rates, the CBC has said such policies hurt consumer spending and financial stability and do little to spur investment.

QuickTake Negative Interest Rates

“Most central banks don’t want rates at zero; it’s a last resort,” said Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “So the overnight rate might just go down by a few basis points over the next 12 months.”

The policy rate will be reduced from its current five-year low of 1.625 percent, according to 25 of 26 economists surveyed by Bloomberg. Twenty-two forecast a cut to 1.50 percent, three project a move to 1.375 percent, and one see no change.

Market Impact

The CBC’s open-market operations have a bigger impact on the market than the official benchmark, which is seen as a policy signal, according to Yeung. The official gauge is a discount rate on bills offered by lenders to obtain funds from the authority and is seldom used because of the ample liquidity in Taiwan’s banking system, he said.

Changes to the one-day rate have recently preceded moves in the official policy rate and influenced bond and currency markets.

The CBC lowered the overnight rate for the first time in three years on Aug. 11, the day China unexpectedly devalued the yuan, and the benchmark was cut a month later following a scheduled review. A second easing of the policy rate followed in December. The one-day rate was last reduced in January, and local bond yields have since plunged to record lows in anticipation that policy will be loosened further.

Gloomy Outlook

The central bank has ample reason to ease: the island’s economy has shrunk for the past two quarters, exports have slumped for 13 straight months and core inflation has remained below 1 percent for a year. While 16 of 21 economists in a Bloomberg survey expect the CBC to cut the benchmark rate at least twice this year, opinions are divided on how low the overnight rate will go.

Taiwan may cut the one-day rate marginally or even keep it unchanged this week, said Claire Huang, a Hong Kong-based economist at Societe Generale SA. Chih-Chiang Hsu, an economics professor at National Central University in Taoyuan who conducts research for Cathay Financial Holding Co., said it’s unlikely to fall further. Leon Chu, a fund manager at Franklin Templeton SinoAm Securities Investment Management Inc., doesn’t rule out the prospect of the rate turning negative.

“The decline of Taiwan’s economy is a slow and long-term process, so the central bank won’t exhaust its tools in one go,” said Taipei-based Chu, who helps Franklin Templeton SinoAm oversee NT$154.8 billion ($4.8 billion). “There’s a possibility for Taiwan to move toward negative rates since this has been the trend for export-oriented economies.”

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