Taiwan: Central Bank cuts discount rate to foster growth
December 17, 2015
At its 17 December monetary policy meeting, the Central Bank of the Republic of China (Taiwan) decided to cut the discount rate by 12.5 basis points, from 1.750% to 1.625%. The move marks the second 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 the world economy closed 2015 with performance that was weaker than expected. Even though the United States grew at a moderate pace, growth in Japan and the European Union remained sluggish, while the emerging markets and China decelerated notably. The Bank went on to add that numerous downside risks remain despite the fact that faster growth is expected in 2016 and 2017. On one hand, the Federal Reserve rate hike has put additional pressures on Asian currencies and has caused a spike in financial market volatility. Volatility in the interbank market may be further exacerbated by the lack of a unified central bank policy among major economies. On the other hand, declining prices for commodities and rising geopolitical tensions are adding to existing uncertainties.
Regarding Taiwan, the Central Bank recognized that growth forecasts for 2015 and 2016 were slashed recently. According to data from the Directorate-General of Budget, Accounting and Statistics (DGBAS), the domestic economy is expected to have grown a meagre 0.5% in Q4 2015 and is projected to expand 2.3% in 2016, which is down from the original forecast of 2.7%. The Central Bank pointed out that muted foreign demand and weak private consumption are insufficient to drive the economy going forward and do not expect that a strong recovery of the world economy would boost Taiwanese industries.
The Bank summarized that the global economic recovery is continuing at a slower-than–expected pace, while growth in the domestic economy has been cut and inflation expectations remain subdued. The Bank decided to cut the discount rate to support economic growth and maintain price stability. The Bank added that, “since the September Board meeting, where a rate cut was decided, the pace of global economic recovery has fallen short of expectations, and domestic growth forecast has been revised down. Meanwhile, the negative output gap has widened and inflation expectations are mild. Against this backdrop, the Board judged that cutting the policy rates and maintaining the M2 growth target range at 2.5%-6.5% to keep monetary conditions accommodative will help foster economic growth.”