December 17, 2015 / 9:50 AM / in 2 years

UPDATE 2-Taiwan cuts rates unexpectedly as global growth weakens

* Taiwan cuts rates for second time this year by 12.5 bps

* Only 4 of 17 economists expected rate cut in Reuters poll

* Global economic recovery worse than expected - cenbank (Adds analyst comments, context)

By Faith Hung and Liang-Sa Loh

TAIPEI, Dec 17 (Reuters) - Taiwan’s central bank cut interest rates for the second time this year and said it would keep monetary policy loose to shore up growth in the island’s trade-dependent economy as the outlook for global demand worsened.

The easing was unexpected with all but four of 17 economists polled by Reuters forecasting no change to the benchmark discount rate, which is now set at 1.625 percent from 1.75 percent.

Analysts describe Taiwan’s cut as a bold move, coming just a day after the Federal Reserve hiked benchmark U.S. rates for the first time in nearly a decade, raising concerns about the potential for capital outflows from emerging markets like Taiwan.

However, for Taiwan’s central bank, a slowing recovery seen in the eurozone, Japan, China and emerging economies remains a primary concern while its strong financial position should help stem a massive capital flight.

“Global economic performance has been worse than expected recently,” the central bank said in its statement.

It said that “cutting the policy rate...will help promote economic growth” and that it will “continue to maintain loose money conditions”.

Taiwan’s export-oriented economy, driven by demand for its signature technology goods, many of which are packed into the popular Apple Inc iPhones, is set this year to turn in its weakest annual growth since the global financial crisis, particularly as growth in China, a key trading partner for Taiwan, is decelerating.

“The rate cut was unexpected,” said Andrew Tsai, analyst with KGI Securities Investment Advisory. “The recent drop in oil prices is worrying, so risks to the downside remain.”

Tsai said he expects another rate cut in the first half of next year.

“Cutting a day after the Fed’s hike is a bold move for the usually cautious (Central Bank of China),” Gareth Leather and Andrew Wishart, Asia economists at Capital Economics, said in a note.

“However, Taiwan’s large current account surplus and ample foreign exchange reserves mean it is well placed to withstand any fallout in financial markets from a shift to tighter monetary policy in the U.S.”

Taiwan deputy finance minister Wu Tang-chieh told Reuters before the rate decision on Thursday that foreign investors in Taiwan had made necessary adjustments before the Fed raised rates.

“Still, we’ll watch how the rate increase will affect capital movements in emerging markets going forward,” said Wu.

Taiwan has recorded net outflows of over $1 billion in December so far, compared with November’s net outflow of $420 million, according to the latest figures by the Financial Supervisory Commission. With the exception of October, the island has recorded net outflows every month since June.

The central bank last cut the largely symbolic policy rate by 12.5 basis points in late September, its first rate change since mid-2011. The policy decision was followed by economic data that showed Taiwan had fallen into recession in the third quarter.

The government is forecasting the economy to rise by a mere 0.49 percent year-on-year in the final quarter of 2015, but weak exports data in November has raised doubts that growth can be sustained. (Additional reporting by Roger Tung, Emily Chan and J.R. Wu; Editing by Sam Holmes)

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