Taiwan Keeps Interest Rate Unchanged Amid Recovery

By Janet Ong and Chinmei Sung

Sept. 24 (Bloomberg) -- Taiwan’s central bank kept its benchmark interest rate unchanged on signs the export-dependent economy will recover as the global recession abates.

Governor Perng Fai-nan and his board held the discount rate on 10-day loans to banks at a record-low 1.25 percent, the central bank said in a statement. That was in line with the estimate of all 12 economists surveyed by Bloomberg News.

Taiwan, like its Asian neighbors, has slashed borrowing costs to help the island recover from its first recession since 2001. The stock index has risen 60 percent this year on optimism improving overseas demand for electronics products will revive an economy that shrank 7.54 percent in the second quarter after contracting 10.1 percent the previous three months.

“The central bank may continue to keep rates steady through the first quarter of next year,” said Ma Tieying, an economist at DBS Group Holdings Ltd. in Singapore. “The magnitude of the economic recovery is still too small.”

Central banks across the region have stopped cutting interest rates as they gauge signs of recovery. Japan’s central bank on Sept. 17 kept the benchmark overnight lending rate at 0.1 percent, while the Bank of Korea held its rate at a record- low 2 percent on Sept. 10 for a seventh month.

Taiwan’s central bank said its current monetary policy is appropriate and the growth in money supply has been “reasonable.” The bank will intervene to keep the island’s currency stable and respond to “hot money inflows,” it said.

Stocks Fall

“Our rate policy depends on the outlook of consumer prices,” Perng said. “Taiwan’s consumer prices will likely stay comfortable through the end of the year.”

Taiwan’s rate decision was released after the close of trading on the island’s stock exchange. The Taiex stock index fell 0.7 percent to close at 7,324.22. The Taiwan dollar weakened 0.1 percent to NT$32.395 against its U.S. counterpart as of 4 p.m. local time, according to Taipei Forex Inc. It touched NT$32.315 yesterday, the highest level since June 2.

“We expect the central bank to keep interest rates steady for the rest of the year as there is no inflationary pressure,” said Cheng Cheng-mount, an economist at Citibank Taiwan Ltd.

Taiwan had cut rates by 2.375 percentage points in seven reductions since late September 2008. That, combined with the government’s planned stimulus of NT$858.5 billion ($27 billion) over four years, have helped boost the island’s recovery.

Slump Eases

Shipments to China, Taiwan’s biggest overseas market, are improving as the mainland implements a 4 trillion yuan ($586 billion) stimulus package. Exports, accounting for 70 percent of gross domestic product, declined 24.6 percent in August, less than economists forecast and easing from a record 41.9 percent drop in January.

Central banks in South Korea, Singapore and Taiwan will likely start to tighten monetary policy early next year as Asian economies show signs of picking up, Barclays Capital economists Wai Ho Leong and Matthew Huang said in a Sept. 22 report.

“Inflation is slowly catching up on a month-on-month basis,” said Christopher Wong, a Hong-Kong based economist at HSBC Holdings Plc. “However, the central bank is still favoring a pro-growth policy because the current employment situation is still very fragile. We would expect the central bank to start tightening next year.”

The statistics bureau said on Sept. 7 “mild” inflation will return at the start of 2010 as the economy recovers.

On Guard

The Asian Development Bank on Sept. 22 increased its economic growth forecast for the region on strengthening expansions in China, India and Indonesia, and said it’s too early for governments to withdraw stimulus policies.

Policy makers globally remain on guard about the world economy. Federal Reserve Chairman Ben S. Bernanke said on Sept. 16 U.S. growth may not be strong enough to quickly reduce the jobless rate.

Taiwan’s unemployment rate climbed to a record 6.07 percent in August and consumer prices fell even as food costs rose after crops were damaged by Typhoon Morakot, the island’s deadliest storm in half a century.

“The central bank may only consider raising rates and be concerned about inflation after the jobless rate stops rising and consumer demand is steadily increasing,” said Ma from DBS. Instead of raising interest rates, Perng may “use open market operations to control the money supply,” the economist said.

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