Taiwan: Central Bank cuts discount rate; leaves door open to intervening in FX markets following Brexit vote
June 30, 2015
At its 30 June monetary policy meeting, the Central Bank of the Republic of China (Taiwan) cut the discount rate by 12.5 basis points, from 1.500% to 1.375%. The move, which was analysts had anticipated, marks the fourth consecutive cut to the discount rate. The Bank also reduced the rate on accommodations with collateral and the rate on accommodations without collateral by 12.5 basis points each.
In its accompanying statement, the Central Bank pointed out that global economic growth is following two divergent trends. Major economies continue recovering at a modest yet steady pace, while growth in emerging economies is weakening. That said, sluggish growth in China has negatively affected the export-driven economy since China and Hong Kong are the destination of nearly 40% of Taiwanese goods. The Bank pointed out that the outcome of the Brexit referendum of 23 June has elevated volatility in global financial markets. Ongoing uncertainty over future developments regarding Brexit has affected monetary policies of major economies and prices for commodities which, in turn, could cast a shadow on the outlook of the world’s economy.
Regarding the Island’s economy, the Central Bank recognized that subdued global growth and global trade have weighed on Taiwan’s external sector and are now impacting private investment and the labor market. Subdued private investment has put a dent in economic growth and resulted in a downward revision by The Directorate-General of Budget, Accounting, and Statistics (DGBAS). Taiwan’s GDP forecast for 2016 was trimmed from the previous estimate of 1.5% to 1.1%. However, the Bank pointed out that the latest revision did not capture the Brexit vote fallout and that the economic outlook might tilt to the downside even further. In addition, if the Brexit results in heightened volatility in FX markets, the “CBC will, in line with its statutory mandates, step in to maintain an orderly market. The CBC also stands ready to ensure that market liquidity is sufficient to support regular economic activity”.
Going forward, weak global growth and the negative implications from Brexit pose additional downside risks to the global outlook and Taiwan’s economy. Against this backdrop, the Bank unanimously decided to cut the discount rate to support economic growth and left the door open to complement Taiwan’s accommodative monetary policy with expansionary fiscal policies and structural reforms to drive continued growth.