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Taiwan Unexpectedly Keeps Rate on Hold Despite Virus Concerns

Taiwan Unexpectedly Keeps Rate on Hold Despite Virus Concerns

The worst economic damage from the coronavirus is behind Taiwan, according to the central bank, which unexpectedly kept rates unchanged and forecast an upturn in the second half of the year.

Taiwan’s monetary authority left its benchmark interest rate at a record-low 1.125% at a board meeting Thursday. The median estimate of economists was for a 12.5 basis-point cut to 1%.

The decision comes despite growing concerns about the worsening economic impact of the global coronavirus outbreak and sagging domestic consumer spending. Strong exports to China and the U.S. and the swift control of the coronavirus have so far largely sheltered Taiwan’s economy from the kinds of fallout seen in Japan, South Korea and elsewhere in the region.

Taiwan Unexpectedly Keeps Rate on Hold Despite Virus Concerns

However, the world is in recession and most of the Taiwan’s trading partners are either still grappling with the first wave of the virus or see smaller flareups. Even so, the central bank remains convinced the economy can grow in 2020, even if at a slower rate than previously thought.

“When we cut the key rate last time, our goal was to reduce the financial burden on the public and on companies,” Governor Yang Chin-long told reporters after the decision. “We achieved that goal so there was no need to cut again this time.”

Gross domestic product is forecast to grow 1.5% this year, down from the central bank’s previous estimate of 1.9% in March. The current quarter will be the worst, and private consumption will start growing again from the July-Sept. period, Yang said.

The central bank expects inflation will slow further, forecasting price rises of just 0.01% this year. After dropping in the first half of the year, rising oil prices and stronger consumption later in the year will cause prices to rise, the governor said.

The consumer price index fell 1.2% in May and the government forecast in May that prices would drop 0.32% this year.

Despite slowing growth and already low interest rates, the governor ruled out unconventional policy steps in the future, saying there was no need to buy corporate bonds or commercial paper, and arguing that negative interest rates would erode the banking sector’s profits.

“The fact the central bank didn’t cut rates this time reflects that Taiwan’s economic performance has been strong compared to other emerging markets,” Cathay Securities Investment Trust’s vice president of strategy research Aidan Wang said in a telephone interview. Wang predicts the central bank will keep rates unchanged until the second half of next year and will instead stabilize the economy mainly by easing credit conditions.

FX “Smoothing”

Over the past week, the central bank has intervened in the currency market on multiple occasions, signaling its unease with the currency’s gains. It has been repeatedly active in the foreign exchange market in the last hour of trading since last Thursday, according to currency traders in Taipei.

The central bank has been “smoothing” foreign exchange markets in June, due to “huge” inflows, the governor said, without giving any details as to the size or timing of operations.

Read more about Taiwan’s FX market operations: Taiwan Reports $99 Billion in Currency Swaps, in Rare Disclosure

As well as Taiwanese firms bringing money home, the stronger economy and comparatively high interest rates have turned Taiwan into something of a haven for emerging-market investors. The result has been a stronger Taiwan dollar, and the potential impact of that on export competitiveness has become a pressing issue for policy makers.

The currency closed at NT$29.655 to the U.S. dollar, its strongest since April 2018. It has risen 1.4% against the greenback this year, the biggest gain in Asia after the Japanese yen.

©2020 Bloomberg L.P.