It is the first change in rates by the Central Bank of the Republic of China (Taiwan) (CBC) since June 2011 and the first rate cut since February 2009.
In addition to the cut to the discount rate to 1.75 percent, the CBC cut the rate on collateral accommodations to 2.125 percent and the rate on accommodations without collateral to 4.0 percent with effect from Sept. 25.
But the rate cut was not unexpected following a report from Reuters earlier this week that said the central bank in a report to the legislative session had said it may cut its rate this week.
The CBC, which said its board was unanimous in its policy decision, confirmed its view that the exchange rate of the Taiwan dollar was in principle determined by financial markets but in the event of "excess volatility and disorderly movements" in the exchange rate, it would "step in to maintain an orderly market."
In its comment on economic developments, the CBC pointed to the slowing economy in China and the depreciation of the yuan which has created spillover effects that led to a postponement of a rate hike by the U.S. Federal Reserve and volatility in international financial markets.
"Consequently, uncertainties continue to surround the growth prospects of the global economy," the CBC said, and the global economy had yet to stabilize.
Inflation in Taiwan has been negative for the last eight months, with an average rate of minus 0.62 percent, mainly due to declines in energy-related prices. In August inflation was minus 0.45 percent and the CBC said excluding prices of fruit, vegetables and energy, the average core inflation rate rose by 0.82 percent.
Inflation is forecast by the government statistics office to average minus 0.19 percent for 2015 and then rebound to 0.74 percent in 2016, echoing the recent report's finding that the central bank does not expect a risk of deflation despite the decline in consumer prices in recent months.
The Taiwan dollar has been depreciating since May and fell sharply in response to the CBC's rate cut. It was trading at 33.2 to the U.S. dollar today, down from 32.9 yesterday, and down 4.5 percent since the start of the year.
The Central Bank of the Republic of China (Taiwan) issued the following statement: