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PBOC move lowers Taiwan's chance of hiking interest rates

2014/11/22 12:52:10

Taipei, Nov. 22 (CNA) A surprise move by the People's Bank of China (PBOC) to cut interest rates has lowered the chance for Taiwan's central bank to kick off a rate hike cycle any time soon, an economist said Saturday.

Cheng Cheng-Mount, president of the Taiwan Academy of Banking and Finance, said that Taiwan is a relatively small economy, which is sensitive to any policy adjustment made by its neighboring countries, including China.

So the unexpected interest rate cut this week by the PBOC, China's central bank, makes it unlikely for Taiwan's central bank to raise interest rates, a move which would contradict China's action, Cheng said.

On Friday, the PBOC announced that it has decided to cut its benchmark one-year lending rate by 0.4 percentage points to 5.6 percent and lower the one-year deposit rate by 0.25 percentage points to 2.75 percent. The rate cuts are scheduled to take effect from Saturday.

It was the first time for the Chinese central bank to lower interest rates since 2012.

After the U.S. Federal Reserve announced in October an end to its latest round of quantitative easing (QE), with the U.S. economy showing signs of a strong rebound, many market analysts suspected that the Fed will start to raise its key interest rates in mid-2015.

As a result, the market had anticipated that Taiwan's central bank would launch its own interest rate hike cycle even before the Fed's rate hikes, to test the waters in the market.

However, Cheng said that after the PBOC's rate cuts, the hope for the local central bank to reverse its current monetary policy by raising interest rates to tighten liquidity has dimmed.

In September, the local central bank left its key interest rates unchanged with the discount rate at 1.875 percent. It is the 13th consecutive quarter in which the central bank has left interest rates the same to maintain ample liquidity and give a further boost to the local economy.

Cheng said that the PBOC's rate cuts came after growth has slowed in the Chinese economy, the second largest in the world. The fund injections through rate cuts are expected to allow its business sector to benefit from rising liquidity, leaving the current credit crunch behind.

In the third quarter of this year, China's economy grew by only 7.3 percent, the slowest pace in more than five years.

Cheng said that as China's inflation remained in check and its interest rates stood at relatively higher levels in the global market, the PBOC has the leeway to cut rates for the moment.

Taiwanese businesses with investments in mainland China could also benefit from this rate cut, by gaining easier access to funds and more business opportunities arising from the credit loosening.

Buynow, a 3C distributor run by Taiwan-based contract notebook computer maker Clevo Co., said that the PBOC's rate cuts are expected to lower a financial burden shouldered by Taiwanese investors operating in China.

(By Pan Chi-i, Kao Cho-fen and Frances Huang)