Taiwan's central bank cut its policy rates, including the benchmark discount rate, by a further 12.5 basis points, as expected, to help maintain financial stability by stemming the inflow of capital and stimulate the economy.
The Central Bank of the Republic of China (Taiwan) has now cut its rates three times since September 2015 by a total of 62.5 basis points, with the discount rate now at 1.50 percent, the rate on accommodations with collateral at 1.875 percent and the rate on accommodations without collateral at 3.75 percent.
The monetary easing is in response to a "sluggish" pace of economic growth in export-dependent Taiwan along with "surges of capital inflows to the domestic market - a reaction to easing in Japan and Europe - that have pushed up the exchange rate of Taiwan's dollar.
"To maintain financial stability while taking into consideration subdued inflation expectations and a widened negative output gap, the Board judged that reducing policy rates will help create a stable financial environment and in turn stimulate the economy," the central bank said.
The central bank added that volatile global financial markets had disrupted domestic foreign exchange and financial markets and confirmed that if there are "disorderly" movements in the exchange rate it would step in to maintain an orderly market.
Taiwan's dollar depreciated from May 2015 until late January this year but since then it has been firming. Today it was trading at 32.5 to the U.S. dollar, up 1.4 percent since the start of this year.
In 2015 the Taiwan dollar (TWD) depreciated by 4.2 percent against the U.S. dollar.
The weakening of the global economy has led to declining exports - they fell by an annual 11.8 percent in February and have declined for the last year - weighing on production, investment and consumption. Exports account for about 70 percent of Taiwan's output.
Nevertheless, the central bank said public spending should return to positive this year, helping boost domestic demand. The government still expects the economy to expand quarter by quarter this year and grow by 1.47 percent for the full year. In mid-February it cut the 2016 estimate from 2.32 percent.
In the fourth quarter of 2015 Taiwan's Gross Domestic Product shrank by 0.52 percent year-on-year, slightly less than the 0.8 percent annual contraction seen in the third quarter.
The inflation rate jumped to 2.4 percent in February from 0.8 percent in January as crop damage from cold weather pushed up the prices of vegetables and fruit while core inflation, which excludes vegetables, fruit and energy, rose by only 0.73 percent, the bank said.
For 2016 the central bank said the Directorate-General of Budget, Accounting and Statistics (DGBAS) forecast inflation of 0.69 percent in light of low international commodity prices, including oil, and a wider negative output gap.
The Central Bank of the Republic of China (Taiwan) issued the following statement: