In Surprise, CBC Drops Interest Rates

In a move that had analysts divided as to whether it was primarily symbolic or substantive, Taiwan’s Central Bank of China (CBC) lowered its benchmark discount rate to 1.75% from 1.875%, the first rate change in sixteen quarters.

The move surprised many economists, with Bloomberg finding that 13 out of 24 economists surveyed had forecast no change, while 11 predicted a slight reduction. Just a day earlier, CBC Governor Peng Fai-nan told the Legislative Yuan’s Finance Committee that interest rates were already low enough, markets had ample liquidity, and that a looser monetary policy would not significantly boost the local economy.

Nevertheless, the CBC announced that effective September 25, the “discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are all cut by 12.5 basis points each to 1.75%, 2.125%, and 4%.” The Bank cited a number of factors behind the unanimous decision at its quarterly meeting. One was the substantial impact on Asian exporters of China’s declining growth rate, which has caused stagnation throughout the region. Taiwan’s exports dropped 14.8% in August for a year-to-date decline of 8.8%, according to the Bureau of Foreign Trade (BOFT). Consequently, the Directorate General of Budget, Accounting and Statistics (DGBAS) slashed Taiwan’s 2015 growth forecast from 3.75% at the start of the year to just 1.56% now, and many economists forecast that Taiwan will struggle to reach 1%.

The CBC also notes that the U.S. Federal Reserve decision to once again postpone a rate hike has fed uncertainty in the global economy and fuels volatility in global financial markets, leading to declining demand for exports.

The Purchasing Managers Index (PMI) calculated by the Chung-Hwa Institution for Economic Research (CIER) and a leading indicator of the health of Taiwan’s manufacturing sector, dropped 3.6% in August, another indication of pessimism. Consumer confidence also continues its slump, with the Consumer Confidence index compiled by National Central University falling to 86.15 in August from 89.58, the fourth straight month of declines. Consumption was a major component of Taiwan’s healthy growth of 3.14% last year, driven in large part by a 24% surge in tourism, but in the first seven months of 2015, that tourist surge slowed to a trickle of only 3% growth in annual comparisons.

Taiwan’s Consumer Price Index (CPI) also fell in August, by 0.45% on sharply falling energy prices, according to the DGBAS. The CBC forecasts an annual drop in the CPI of 0.19%.

“Against this backdrop, the Board judged that a policy rate cut will help maintain price and financial stability and foster economic growth,” the CBC wrote in a statement.

Some economists saw the rate cut, juxtaposed against anticipated rate hikes by the U.S. Fed, as an indication that Taiwan’s monetary policy “may detach from the implicit anchor of U.S. Fed policy,” as Raymond Yeung, an analyst with the Australia New Zealand Banking Group, was quoted as telling Bloomberg.

Gordon Sun of the Taiwan Institute for Economic Research (TIER) told a press conference on September 25 that the interest rate cuts would have little impact on Taiwan’s manufacturing sector but could serve to psychologically boost the service sector, particularly financial services, noting the mid-August plunge in Taiwan’s stock market that necessitated the utilization of the National Stabilization Fund. “The Central Bank has provided a placebo – the dose of the active ingredient is not significant but it could provide comfort,” he said. “If (the rate cut) bolsters investor confidence and stabilizes the financial sector, then it is a good policy.”

The NT dollar has declined more than 6% since the summer, closing at NT$33.292/US$1 on September 25. Manufacturers consider the depreciating NT$ an asset, as it makes Taiwan’s exports cheaper, but Michael Boyden of Taiwan Asia Strategy Consulting foresees little benefit to exports “as the problem is very weak demand, not competitive pressure.”