Starting today, the discount rate will be cut to 2.00 percent per annum from 2.75 percent, the CBC said in a statement.

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 5:00 percent. The rate cut, the highest since a reduction of 0.75 of a percentage point in December 1982, highlighted the deteriorating economic situation challenging Taiwan's economy.

"The decision was made, considering the various unfavorable economic data," Perng Fai-nan, governor of CBC, told reporters at the close of a board meeting.

Among the major factors forcing the CBC to make such a big cut were the eased inflationary pressure and continued economic downturn, according to the CBC statement. In fact, the Cabinet-level Directorate General of Budget, Accounting and Statistics, forecast that the domestic consumer price index would increase at a negligible 0.37 percent next year.

"The global economies are in recession and the demand from abroad is weakening, thus leading the export sector, the engine of the economy, to register negative growth for three months in a row," the CBC said in the statement.

"The downturn risk of the economy remains high in the first half of next year," it said.

The central bank said it believes the five rate cuts, of an accumulated 1.625 percentage points, would help the domestic enterprises lower their costs and bolster domestic demand.

In November, the island's exports declined 23.3 percent from a year earlier, the largest fall since October 2001, due mainly to weakening demand for electronic products amid a global economic meltdown, according to the Ministry of Finance.

The island's exports to China and Hong Kong plunged 38.5 percent from a year ago to US$5.63 billion in November, and shipments to the U.S. dropped 14.2 percent to US$2.38 billion.

In response to the sharp rate cut, top executives with domestic banks said that the reduction can help to lower the cost of operating funds of banks and ease the interest payment burden on borrowers, which, in turn, can lower the non-performing loan ratios.

Foreign institutional investors said that the loose monetary policy adopted by Taiwan's central bank will make the Taiwan stock exchange market more attractive to investors.

Christina Liu, chief economist of the Daiwa Institute of Research, said that now that major nations of the world are rushing to adopt loose monetary policies, the CBC can hardly go against the trend and therefore its decision to sharply slash its key interest rates should be well recognized.

The interest rate cut also came as a big boon to borrowers of bank loans, especially housing loans. For every NT$1 million in housing loan, an interest payment of NT$625 can be saved per month, translating into a total of NT$7,500 per year. And the annual interest payment saved would amount to NT$37,500 per year for a housing loan of up to NT$5 million.