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Economy

Taiwan again cuts key rate amid weak economy, global easing

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Taiwan's central bank Gov. Perng Fai-nan gestures during a news conference in Taipei, on March 24.   © Reuters

TAIPEI -- Taiwan's central bank on Thursday cut a key discount rate for the third straight quarter, pressured by sluggish economic growth due to faltering exports, as well as the merry-go-around of monetary easing elsewhere in Asia and in Europe.

     The bank cut its benchmark discount rate to 1.5% from 1.625%, as widely expected by analysts. It also loosened restrictions on housing mortgages, canceling a cap that has limited some home buyers to borrow no more than 60% of the property value, as part of efforts to boost the economy. Taiwan's economy is headed for a third consecutive quarter of contraction, amid a slowdown in China.

     "We are cutting the rate to boost real demand and to maintain financial stability," central bank Gov. Perng Fai-nan said at a press conference. He added that to prop up Taiwan's economy, monetary policy alone is not enough, while spending on public infrastructure could help boost economic growth.

     "(Hot) money has been flowing into Asia following the European Central Bank's further rate cuts, and we can reduce the rate gap with our cut," Perng said, indicating that the cut also serves to stabilize movements of hot money.

     However, Perng said it is unlikely that Taiwan will introduce negative rates before his current term ends in February 2018. "Taiwan is not suffering from credit crunch and there is still a lot of room for our monetary policy," Perng said, pointing to Taiwan's relatively high interest rates.

     Taiwan's benchmark Taiex index closed down 0.26% at 8,743.38 ahead of the interest-rate cut announcement in the late afternoon.

     Taiwanese officials estimate that the island's economy will grow a tepid 1.47% this year, following 0.75% for 2015. Taiwan's exports have contracted year-on-year for 13 consecutive months since February 2015, and the decline would continue for months, according to local authorities.

     Director Yeh Maan-tzwu of the department of statistics at the Ministry of Finance told reporters on March 7 that since Taiwan's exports may not grow until the second half of this year, they may suffer a longer slump than the 14 consecutive months during the global financial crisis back in 2008-2009.

     Meanwhile, slow sales for Apple's flagship iPhone 6S and 6S Plus have hurt performance of Apple's supply chain in Taiwan since the end of last year.

     Key iPhone assemblers Hon Hai Precision Industry and Pegatron Corp. both suffered year-on-year declines in revenue, down 8.55% and 10.77% respectively for the first two months of 2016. Revenue of Taiwan Semiconductor Manufacturing Co., Apple's core processor chip manufacturer, also dropped 12.9% year-on-year during the period.

     Liang Kuo-yuan, chairman of Yuanta-Polaris Research Institute, expressed doubt about the effectiveness of the central bank's move to prop up economy. "The rate cut will do almost nothing to help encourage investment. It will mainly prevent short-term capital movements, or hot money, from flowing in," Liang said, adding that it is unlikely Taiwan's economy will grow significantly this year.

     Lee Hsien-feng, an economist at National Taiwan University, said that while Taiwan's central bank is hoping to block out hot money and boost investment, the island is not suited for negative rates. "Our inflation has stayed at 2%, compared to deflation in Japan and elsewhere, so we should not adopt a negative rate policy," Lee said.

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