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Economy

Taiwan keeps key rate steady on expectation of mild recovery

Central bank governor voices concerns about rise of protectionism

Taiwan central bank Governor Perng Fai-nan is worried that protectionism could hurt Taiwan.

TAIPEI -- Taiwan's central bank held its key interest rate steady at 1.375% for the second consecutive quarter on Thursday, in line with market expectations.

"Considering Taiwan will undergo mild economic recovery next year and we still face a negative output gap, the [central bank] board feels the key rate should remain unchanged ... and continue with quantitative easing to boost economic growth," the monetary agency said in a statement.

Governor Perng Fai-nan said while Taiwan had benefited from globalization with its contribution to the international tech supply chain, he expressed worries that the election of Donald Trump as U.S. president could lead to a rise in protectionism, which would in turn hurt Taiwan and the global economy.

"Every country will lose if [all countries] walk down the path of protectionism," Perng told reporters on Thursday after the announcement of the interest rate decision, adding that governments must come up with ways to help people left behind by globalization, including introducing measures to help the unemployed find jobs.

Perng further pointed out that growing automation is a key reason behind jobs disappearing in the U.S. manufacturing sector, and that the outsourcing of production overseas by American companies was just one factor.

"The U.S. manufacturing sector will not be able to get the job level back to what it was before," Perng said, citing a recent article he read.

Woods Chen, chief economist of Yuanta Investment Consulting in Taipei, said that Taiwan was likely to hold the key rate steady for a while, in line with actions taken by other countries.

"If we raise interest rate, that might lead to a strong Taiwanese dollar which might not be a good thing for Taiwan's exports," Chen said. "Also, as most of the countries except the U.S. continue to keep rates very low and continue to adopt quantitative easing, it's likely that Taiwan's central bank would follow this similar path."

"We think the elections in Europe, and cross-strait relations -- such as what China will do next year -- are all downside risks to the Taiwanese economy. Despite some recent improvement in exports, it is not yet time to go back to the rate-hike cycle," he said.

Gareth Leather, senior Asia economist at Capital Economics, has a slightly different view. Although he sees an improvement in the economy for the time being, he reckons "there is a good chance the [central bank] will resume its rate-cutting cycle next year," as the outlook for the coming year is not bright. He stated in a note that given the "inflation expectations [to be] low and plenty of spare capacity left in the economy," he thinks there is more room for easing.

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