Fearing a bleak outlook for 2009, Taiwan's central bank announced slashing its benchmark interest rate by 0.75 percent, its largest rate cut in 26 years, bringing the policy discount rate to 2 percent. The rate cut came into effect from Dec 12, 2008.

Since September, the central bank has cut policy rate by 1.625 percent totally.

The interest rate for accommodations with collateral will drop to 2.375 percent per annum from 3.125 percent, and that for accommodations without collateral will decline to 4.25 percent from 5 percent.

It believes the five rate cuts would help local enterprises lower their costs and bolster domestic demand.

The global economies are in recession and the external demand is weakening.

Taiwan's exports have registered negative growth for three consecutive months, while the worsening unemployment situation and weakening capital market will have negative impact on demand.

The central bank said that Taiwan's economic growth has fallen into negative territory during the second half of this year and that downside risks will remain for the first half of 2009.

The Academia Sinica forecasted economic growth is likely to be near zero - standing at just 0.56 percent.

Taiwan government cuts its forecast for next year's growth to 2.12 percent from 5.08 percent.

Direct daily flights between the mainland and Taiwan began on Dec 15, following agreements on cross-Strait relations signed by the two sides on Nov 4 on expanding transport exchanges, postal services and establishing a food safety mechanism.

Prospects of Taiwan's economy can be summarized as follows:

Taiwan's economic conditions look set to weaken in the first part of next year.

Exports dip sharply in fourth quarter.

Private consumption continues weakening.

Domestic investment wanes.

Inflation risks ease as the global economy slows.

Polaris Securities (Hong Kong) provided the analysis

(HK Edition 12/18/2008 page3)