Taiwan Unexpectedly Lowers Interest Rate

Taiwan's central bank unexpectedly reduced interest rates for the first time since 2003, saying the global financial crisis has raised the risk of an economic slowdown. Governor Perng Fai-nan and his board cut the discount rate on 10-day loans to banks by 12.5 basis points to 3.5 percent in Taipei yesterday. Two of 13 economists surveyed by Bloomberg News expected the decision. Ten forecast no change and one a rise.

Perng joins counterparts in China, Australia and New Zealand in lowering rates this month as share markets tumble and the world's economic expansion falters. Central banks globally are trying to ease a credit squeeze as US$523 billion in losses and writedowns tied to a slump in the U.S. mortgage market erode investor confidence and prompt bankers to hoard cash. "Governor Perng is worried about the economy," said Ernest Lee, a bond trader at Mega Securities Co. in Taipei. "He's trying to prevent a recession."

Taiwan's Taiex index has slumped 29 percent this year, more than declines in equity markets in Japan, South Korea and Singapore. The rate decision was released after the close of trading on the Taiwan Stock Exchange which fell 1.2 percent to 6,060.83 yesterday. "The bond and stock markets will have a celebration rally tomorrow" after the rate cut, Mega Securities' Lee said.