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Taiwan central bank steps up policy easing via money market rates

An employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China, on Wednesday, Aug 12, 2015.

[TAIPEI] Taiwan's overnight interbank rate fell for the fourth consecutive day on Friday as the central bank stepped up its actions to shield the economy from the impact of China's surprise currency devaluation this week.

The latest move by Taiwan's central bank is a sign of backdoor policy easing by authorities to cheapen its currency to help exporters already struggling with slowing global growth, and to ensure ample funds in the domestic banking system.

The overnight interbank rate, a market rate that tends to be guided by the central bank, was lowered to 0.379 per cent Friday from 0.382 per cent on Thursday.

It is down by slightly less than a basis point in the last four days since the central bank began guiding it lower on Tuesday following the devaluation of the Chinese yuan. "It is not the magnitude of the move in the last few days but the direction in which overnight rates are headed which is important," said an Asia macro strategist at a hedge fund in Hong Kong.

While benchmark discount rates have held at 1.875 per cent since July 2011, interest rates on short-term money market instruments such as certificates of deposits have slid in recent weeks anticipating policy action in the wake of a falling stock market and declining exports.

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Taiwan's stock market has fallen more than 17 per cent since the start of May while the growth rate of export orders received has fallen into negative territory since April.

The last time Taiwan's central bank guided the overnight interbank rate was in July 2012, when the rate fell by a total 11.8 basis points over a two-week period in response to a slowing domestic economy.

Taiwan's trade-reliant economy slowed sharply in the second quarter caused by a collapse in exports. The government is expected later on Friday to chop its current 3.28 per cent 2015 annual growth forecast, with private growth estimates ranging between 1.3 and 2.5 per cent. "Our view is that the central bank will wait to see the July-August data before deciding whether to take bolder easing measures," said DBS in a research note out on Friday. "If the trade data were to remain sluggish in the third quarter, negative spillover effects could emerge in the domestic economy, which would in turn, prompt the CBC to cut the benchmark rate at the next policy meeting in September."


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