Taiwan May Keep Key Rate Unchanged on Dimming Growth Prospects

By Janet Ong

Sept. 25 (Bloomberg) -- Taiwan's central bank may leave interest rates unchanged today, ending a four-year campaign of raising borrowing costs, as inflation pressures ease and economic growth slows.

Governor Perng Fai-nan and his board will keep the discount rate on 10-day loans to banks at 3.625 percent, according to 10 of 13 economists surveyed by Bloomberg News. Two expect a rate cut, and one forecasts an increase. The bank's decision is due after 5 p.m. in Taipei.

The bank last week reduced the amount of deposits that lenders are required to set aside as reserves and injected funds into the money market as global financial turmoil worsened after the collapse of Lehman Brothers Holdings Inc. Policy makers in China, Australia and New Zealand lowered interest rates this month as the world's economic prospects dimmed.

``Downside risks to growth should become more of a priority for the central bank than upside inflation risk,'' said Sean Yokota, an economist at UBS AG in Hong Kong. ``Interest-rate increases are finished in Taiwan, and we forecast cuts to start in March 2009.''

The Central Bank of the Republic of China (Taiwan) raised borrowing costs at each quarterly meeting between September 2004 and June 2008, increasing the benchmark rate from a low of 1.375 percent.

Falling fuel prices and slowing growth cooled the island's inflation to 4.78 percent in August from a 14-year high of 5.91 percent in July. Consumer prices in China last month weakened to the slowest pace since June 2007 and Hong Kong's inflation moderated for the first time in five months.

Less Pressure

``Inflation in Taiwan has eased so that takes away the pressure for the central bank to raise rates,'' said Alan Liao, an economist at Chinatrust Commercial Bank in Taipei. ``The dismal global conditions may hurt external demand and damp domestic consumption.''

Exports make up about 50 percent of the economy and have been a major driver of Taiwan's six-year economic expansion.

United Microelectronics Corp. said this week it will restrict hiring amid slowing demand for semiconductors. The Hsinchu, Taiwan-based chipmaker forecasts third-quarter revenue may fall because of flat shipments and a decline in prices.

Taiwan Semiconductor Manufacturing Co., the world's largest custom-chip maker, forecast third-quarter sales below analysts expectations on slower demand from U.S. customers such as Texas Instruments Inc. and Nvidia Corp.

Taiwan's export orders increased by the least in five years in August as demand from China fell and sales to the U.S. slowed. The jobless rate rose to a six-month high of 3.93 percent.

Falling Shares

The island's benchmark Taiex index has tumbled 28 percent this year, more than declines in equity markets in Japan, South Korea and Singapore, on mounting signs of an economic slowdown.

Falling share prices have reduced investors' wealth and, coupled with rising living costs, prompted consumers to cut spending. Retail sales fell 1.9 percent in August from a year earlier, the third consecutive decline.

The government on Sept. 11 announced a NT$180.9 billion ($5.6 billion) package of spending and tax cuts aimed at bolstering domestic demand and reviving the stock market.

``Taiwan's economic decline will become more significant and it is better to cut rates sooner than later so it can be more effective,'' said Cheng Cheng-mount, an economist at Citigroup Inc. in Taipei.

Cheng is one of two economists in the Bloomberg survey to predict a rate reduction of 12.5 basis points today.

Following are economists' forecasts for Taiwan's benchmark interest rate at today's meeting:

==========================================
9/24/2008                      Benchmark
                                   Rate
==========================================
Date of Release                   25-Sep

Median                            3.625%
Average                           3.625%
High Forecast                     3.750%
Low Forecast                      3.500%
Number of Participants               13
Previous                          3.625%
------------------------------------------
Barclays Capital                  3.625%
CFC Seymour                       3.500%
Citigroup                         3.500%
Chinatrust Commercial Bank        3.625%
DBS Group                         3.625%
Forecast Singapore                3.750%
HSBC                              3.625%
Ideaglobal                        3.625%
ING Bank                          3.625%
Japan Center for Intl Finance     3.625%
KGI Securities                    3.625%
Reuters IFR                       3.625%
SinoPac Holdings                  3.625%
==========================================

To contact the reporter on this story: Janet Ong in Taipei at jong3@bloomberg.net