Central bank sees downside risks to inflation amid virus scare

TAIPEI (CNA) — The central bank is expecting downside risks to inflation in Taiwan at a time when the spread of the novel coronavirus disease COVID-19 is impacting global demand and causing plunging crude oil prices.

In a report to be submitted to a hearing at the Legislative Yuan scheduled for Thursday, the central bank said the economic impact of the virus is expected to hinder private consumption.

Although local consumer prices are growing steadily, the central bank said, downside risks to inflation remain possible under the current unfavorable circumstances as the virus continues to spread.

In the wake of the virus’ impact, major economic institutions have cut Taiwan’s gross domestic product (GDP) for 2020 by 0.1-0.7 percentage points, according to the report.

In February, the Directorate General of Budget, Accounting and Statistics (DGBAS) cut its forecast for Taiwan’s 2020 GDP growth from 2.72 percent to 2.37 percent and expects the consumer price index to grow 0.62 percent, down from an earlier forecast of 0.71 percent.

In the report, the central bank said, the COVID-19 contagion has been faster than the spread of the severe acute respiratory syndrome (SARS) in 2003, so the economic damage at home and abroad is expected to more severe.

Citing the central bank report, market analysts said the bank was hinting it could ease monetary policy by cutting interest rates down the road to mitigate the impact of the virus at a time when major central banks around the world, including the U.S. Federal Reserve, have started to lower interest rates.

On March 3, the Fed made an emergency decision to cut its key interest rates by 0.50 percentage points in a bid to ease monetary policy and combat the economic risks posed by the COVID-19 outbreak. The Fed will hold a policymaking meeting next week and the market is widely anticipating the U.S. central bank will cut interest rates again.

In its last quarterly meeting on Dec. 16, 2019, Taiwan’s central bank maintained its monetary policy for the 14th consecutive quarter, leaving the discount rate at 1.375 percent, rates on accommodations with collateral at 1.750 percent, and rates on accommodations without collateral at 3.625 percent.

The central bank has scheduled another quarterly meeting for March 19, which is being closely watched by the market for signs as to the bank’s next move.

The central bank said the impact of the COVID-19 contagion on the local economy is expected to be more apparent in the first quarter, but after infections ease, private consumption will rebound due to deferred purchases.

In addition, Yang said the local economy could see some support on the back of government stimulus measures in response to the contagion.

In the report, the central bank said it will continue to monitor fund flows in the foreign exchange market and step in to maintain market order and stabilize the forex market in the event any sudden fund inflows and outflows cause irregularities.

The central bank added it will provide the market with sufficient funds, closely watch liquidity levels and credit quality in the local financial system, while also continuing its efforts to conduct monetary policy efficiently and effectively.