The Central Bank is likely to increase the reserve ratio for domestic banks by between 0.5 percent and 1 percent at a meeting of its board today to further absorb excess liquidity in local financial markets, analysts said Wednesday.

They also predicted that the central bank will keep the discount rate unchanged at 1.25 percent, given the gradual pace of economic recovery and the absence of inflationary pressure.

The reserve ratio is currently 9.775 percent for passbook deposits and 5 percent for time deposits. They were last adjusted in September 2008.

Tony Phoo, chief economist at Standard Chartered Bank (Taiwan), said increasing the reserve ratio would give the central bank flexibility in regulating market liquidity at a time when soaring property prices in Taiwan are raising concerns of a property bubble.

The measure would also help domestic banks identify their nonperforming assets, Phoo said.

Kevin Hsiao, a financial analyst at UBS AG's Taipei branch, held a similar view. He said raising the reserve ratio would allow the central bank to curb excess liquidity without upsetting Taiwan's economic growth.

Shea Jia-dong, a former central bank governor who currently serves as chairman of the Taiwan Academy of Banking and Finance, said that in addition to raising the reserve ratio, issuing negotiable certificates of deposit (NCDs) and accepting redeposits from banks will also allow the central bank to absorb excess liquidity on the market.

According to Shea, given that skyrocketing property prices are seen only in certain regions in Taiwan, it would not be appropriate for the government to adopt across-the-board control measures.

Liang Kuo-yuan, president of the Polaris Research Institute, said issuing NCDs would be a simpler way than raising the reserve ratio to soak up liquidity and would also be less likely to shake market sentiment.

Those who do not understand the government's monetary policy might mistake a reserve ratio hike for an interest rate hike, which could disrupt financial markets, Liang said.

He acknowledged, however, that if the government's main focus is to cool the overheated property market, then increasing the reserve ratio would probably be the most effective strategy, but he could not say how effective it would be.

China Daily/CNA

(HK Edition 03/25/2010 page4)