Taiwans central bank surprisingly left interest rates intact at a record low of 1.25 percent on Thursday, its first pause after seven straight cuts aimed at supporting the export-led economy amid a global recession. However, with economy expected to remain in recession for much of this year, analysts still think the central bank could cut rates further after slashing them by a total of 237.5 basis points since September.
Central Bank Governor Perng Fai-nan said implementing a series of fiscal stimuli would help the economy further, besides the central banks loose monetary policy, hinting that the government could do more in public spending. "Theyll have to switch towards a change in fiscal policy now instead of relying solely on interest rate cuts," said Joseph Lau, an economist at Credit Suisse.
The Taiwan government hopes to spend T$150.7 billion ($4.5 billion) this year, as part of its plans to pour T$500 billion over the next 4 years in public spending. It gave out shopping vouchers worth T$83 billion - about T$3,600 per citizen - to boost domestic consumption and did not rule out giving out more later.
"Im not ruling out any cut of 25-50 basis points in the future, but any cut will be largely symbolic because rates in the money market are now almost down to zero," Lau said Besides Credit Suisse, HSBC and Mega Securities are also eyeing more possible rate cuts later this year.
Perng initially told a news conference after the rate announcement that "interest rates cant go any lower", but he appeared to backtrack when asked to clarify and said: "We have to monitor the economic situation for any future rate decisions." A Reuters poll had showed that nine out of 14 economists expected Taiwan to cut rates by a quarter point to 1.0 percent on Thursday, with the others forecasting rates to remain on hold.
During September 2008 and February, Taiwans central bank cut rates at all its two scheduled and five emergency meetings ones to cut rates by a total of 2.375 percentage points. Overnight rates in Taiwans money markets are currently trading at around 0.1 percent, a sign that liquidity is ample in the islands financial system.
"We believe the central bank has other options to achieve an easing of financial conditions, before any unconventional quantitative easing is called for," Goldman Sachs said in a report. Central banks across the region have slashed interest rates and governments have doled out billions of dollars to spur domestic consumption and investment.
However, some central banks have refrained from cutting rates over the past month, saying that they needed more economic data to gauge future rate direction. Earlier in March, Australia and South Korea decided to keep their main policy rates unchanged at record lows. Asian economies, which are heavily reliant on exports, have been battered by the global crisis as it dampened demand from the developed economies for their key products.
Taiwan slipped into recession after fourth quarter gross domestic product contracted by a record 8 percent from a year earlier. In Asia, Hong Kong, Singapore and Japan have also fallen into recession. Taiwan, where the jobless rate rose to a record high of 5.6 percent as exports dwindled, is likely to post its worst-ever economic contraction this year amid a deepening recession that the government said would last through the third quarter.
Taiwan also faces increasing deflationary pressures stemming from weakening consumer spending. Taiwans consumer price index (CPI) logged its first fall in February, though the timing of the Lunar New Year might have exaggerated the weakness. The central banks announcement came after Taiwans financial markets closed. The Taiwan dollar firmed to T$33.820 to the US dollar, while the main TAIEX stock index rose 0.75 percent to a 5-1/2 month high.
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