Taiwan cuts interest rates, joins global move

TAIPEI (Reuters) - Taiwan's central bank cut interest rates on Thursday for the third time in about a month, joining efforts by the Federal Reserve and other central banks around the world to cushion the economic fallout from the global financial crisis.

The central bank cut its benchmark discount rate by 25 basis points to 3.00 percent, the lowest since June 2007, pushing the Taiwan dollar and the stocks sharply higher on hopes that the easier credit will stave off a sharp downturn for the economy.

The cut marked the central bank's third reduction since late September and follows cuts on Wednesday by the Federal Reserve and the central banks of China and Norway. Hong Kong also cut rates earlier on Thursday and others are expected to follow.

"China lowered rates last night, and the Fed in the U.S. also did the same, so Taiwan's central bank immediately took the same step this morning because the global economic outlook isn't good and there's still big doubts about global slowing," said Tony Phoo, economist at Standard Chartered.

"I don't rule out another emergency lowering of rates."

But after such a fast fall in Taiwan's interest rates, future cuts are uncertain and changes would probably depend on the course of U.S. rates, Enoch Fung, an economist at Goldman Sachs, said in a report.

Earlier this month, Taiwan's central bank cut its benchmark rate by 25 basis points in an emergency meeting it called after a round of globally coordinated rate cuts. It also cut rates by 12.5 basis points at a regular board meeting in late September.

The central bank highlighted the risk of an economic slowdown for the tech-reliant economy as the rationale for the latest cut. It said in a statement that inflationary pressures would ease.

"Due to the global situation right now, we're expecting next year's economic growth to be slower than this year, but inflation will also be lower next year," Central Bank Governor Perng Fai-nan said at a news conference.

Taiwan is sensitive to global trade winds, so it is reliant on the economic health of major demand centers such as the United States, Europe and China.

Taiwan's exports orders, an indicator of the strength of global tech demand and a driver of the island's economic growth, grew in September at their slowest pace in 6- years.

COMBAT SLOWING ECONOMY

The government has tried to shield the economy and markets from the global financial storm unleashed by the bursting of the U.S. housing bubble by cutting the amount of cash that banks have to keep on reserve with the central bank.

It has also extended repurchase agreements with financial institutions to ensure liquidity and provided guarantees on all bank deposits and short-term interbank loans to the end of 2009.

After the rate cut, the benchmark TAIEX stock index surged more than 6 percent. The Taiwan dollar jumped 1.2 percent.

Taiwan's statistics agency said in August that economic growth would pick up to more than 5 percent in 2009 from a forecast 4.30 percent for 2008, although economists say the figures are clearly outdated now.

A Reuters poll at the end of September suggested 2009 growth would slow to 4.1 percent from 4.2 percent in 2008, although Macquarie Bank research two weeks ago suggested Taiwan's economy could even shrink next year.

The central bank's latest rate cut came after the United States and China kicked off what is likely to be a global round of interest rate cuts, part of a barrage of measures aimed at fighting the worst financial crisis since the Great Depression in the 1930s.

The Federal Reserve cuts its fed funds rate by half a percentage point to 1.00 percent, the lowest level since June 2004.

Norway's central bank cut by a similar margin while China cut its benchmark one-year lending rate to 6.66 percent from 6.93 percent.

The Bank of Japan will consider cutting its rate, currently 0.5 percent, on Friday but will watch market conditions before deciding, a source with knowledge of the matter told Reuters on Wednesday.

The European Central Bank, Australia and the Bank of England are expected to ease policy at their regular meetings next week.

On Thursday, Hong Kong also lowered its base rate charged through its overnight discount window by 50 basis points to 1.50 percent. Hong Kong tracks U.S. interest rate movements because its currency is pegged to the U.S. dollar.