05.16.2001
US Fed cuts interest rates to 4.0% - CBC to follow with 12.5 bp cut

• As we expected, the US Federal Reserve yesterday cut its benchmark interest rate to 4.0% from 4.5% at its Open Market Committee Meeting. The move brings US interest rates in line with Taiwan rates. We reiterate our view that Taiwan's Central Bank (CBC) is likely to follow suit by announcing a 12.5 basis points cut in its rediscount rate. The CBC could take action as early as this afternoon.

• VB Primasia Opinion: We expect another 12.5 basis points rate cut in June, bringing the CBC's rediscount rate down to 3.75% by the end of 1H01. In an attempt to boost GDP growth, the CBC has already cut interest rates five times since December 2000, leveling the rediscount rate at 4.0% compared to 4.75% at the end of last year. We do not expect the interest rate cuts to feed through to the economy until at least 4Q01, and even then any recovery in GDP growth will be minimal. We leave our 3.7% GDP growth forecast for 2001 unchanged.

IrmakSurenkok@Primasia.com +886-[0]2-2547-8873