TAIPEI (Reuters) - Taiwan will struggle to reach its economic growth forecast this year, the island’s central bank governor said Thursday, in comments that point to the possibility of an interest rate cut later this month.
Perng Fai-nan, who was taking questions from lawmakers in parliament, also indicated that cutting rates will have limited effect on boosting the economy due to Taiwan’s reliance on exports to drive growth, but that such a move can stem hot money inflows amid a rally in domestic stocks.
A bellwether for global technology demand due to the number of gadgets that use components made by Taiwanese companies, the island continues to struggle as the global outlook weakens.
Taiwan’s government last month downgraded its outlook for 2016 economic growth for the second time to 1.47 percent, with a year-on-year contraction expected for the first quarter this year.
Exports of other Asian economies, such as South Korea and China, have been contracting, Perng said.
“We must redouble our efforts,” he said, adding that he was “not optimistic” about Taiwan’s economic outlook for 2016.
However, Perng said fiscal policy would be more effective in supporting growth than monetary policy, which he described as already loose.
He reiterated statements in the central bank’s report to parliament that monetary policy would be more effective when paired with fiscal expansion and structural reform.
“If rate cuts can solve the exports problem that would be simple,” he said.
The central bank will hold its quarterly policy meeting March 24. At each of its two previous meetings, it lowered the policy discount rate by 12.5 basis points.
Rate cuts, however, can stem the inflow of hot money, Perng said, pointing to significant buying by foreign investors in the domestic bourse since late January.
“It is short-term capital,” said Perng.
Foreign investors have been net buyers of Taiwan’s stock market in February and in March so far.
The main index is hovering around four month highs and is up around 3.6 percent since the start of the year. It also rose 13 percent from its lowest close hit in late January to its recent year-to-date closing high reached earlier this week.
Reporting by J.R. Wu; Editing by Simon Cameron-Moore and Sam Holmes
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