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Following the CNY regime change, Taiwan's central bank quickly reverted to cutting its open market operation (OMO) rates. The CBC reportedly lowered the overnight (O/N) guidance rate by a cumulative amount of 6.8bp to 0.37%, equivalent to roughly half of a standard policy rate cut (12.5bp). This occurred after a long period of stability dating back to August 2012. Meanwhile, the pace of liquidity withdraw did not slow but rather accelerated, indicating plentiful liquidity in the financial system. This means the central bank can easily guide rates lower, even with escalation in liquidity absorption.
The central bank also noted in a press release one month ago that it would adopt "loose monetary policy" to boost economic growth. Therefore, even if there is ample liquidity onshore and OMO rate cuts, the central bank may still cut the headline policy rate by 12.5bp, just to signal its commitment to supporting the economy amid weak global demand, and to boost confidence, states Societe Generale.
