Taiwan’s central bank cuts rates too

Taiwan's central bank cut policy rates more aggressively than the market expected. The rate cut to 1.125% from 1.375% was deep, but not unusual compared to what other central banks are doing around the world. This is the first move since 2016, and lower than the 1.25% we saw during the global financial crisis.

For the first time, the central bank has introduced a TWD 200 billion lending pool for small-medium enterprises for six months, which aims to help SMEs surf through the tide of Covid-19’s damage on operations, which should, in turn, stabilise the job market. In our view, this should be more effective than the fiscal stimulus planned by the government so far.

But, we think the assumption that Taiwan needs low interest rate funding for a period of six months is quite optimistic.

Global demand has been hit, the recovery may be gradual if the job market is dismal even after Covid-19 subsides which will subsequently lower demand for electronic products, e.g. smartphones, which are more of a luxury item than a necessity. Taiwan’s manufacturing and export demand will also be hit but this relief lending pool should help.

To prevent tight liquidity conditions, a liquidity injection of up to 180 days funding now includes banks, bills, postal, security firms, insurance companies.

Taiwan has scaled up its fiscal stimulus from TWD60 billion discussed on 27 February, to TWD100 billion on 18 March 2020. This is now equivalent to 0.5% of nominal GDP estimated by the government for 2020, up from 0.3% in late February. But the scale of this package is still smaller compared to other economies’ stimulus, which is generally 2% or above GDP.

The smaller scale of fiscal stimulus could be explained by the unaffected manufacturing and export sector. But if we look ahead, many manufacturing economies are still battling with Covid-19, as their factory operations remain suspended.