Central bank vice-governor Shea Jia-dong told reporters the bank was raising the interest it pays on banks' mandatory reserve accounts to 3.2 per cent from 2.7 per cent. The bank had increased the rate on November 16 for the first time since 1975.

Shea said adjusting the interest rate on mandatory reserves was preferable to cutting reserve requirements as it would more directly help the banks rather than the money market, which already is flush with liquidity.

"Banking system liquidity is already loose, so it's not the proper time to cut reserve requirements," Shea said. "But (the move) will lower banks' funding cost and alleviate businesses and individuals' interest rate burden on loans."

Shea said the rate increase, which takes effect on Thursday, would boost banking system liquidity by T$93.2 billion (US$2.9 billion), or anaverage of about T$3.2 billion per bank.

The bank has cut reserve requirements twice since August and the rediscount rate and rate on accommodations against secured loans three times since September in a bid to mute a slowdown in the economy by keeping the money market liquid.

Asia's recession has slashed demand for Taiwan exports, helping to slow the island's 1998 economic growth to five per cent or less from a more typical 6.77 per cent in 1997.

Analysts welcomed the bank's newest stimulus but noted weak confidence could not be ended overnight.

The government has enacted a series of measures to jumpstart the slowing economy and halt a sharp decline in share prices, ordering a US$6-billion acceleration of infrastructure projects and forming a US$8.8-billion stock stabilisation fund in addition to various monetary stimulus schemes.

On December 30, the state unveiled a T$150-billion, low-cost housing loan initiative to revive the long-depressed property market.

But the hypersensitive stock markethas been unimpressed.

The benchmark stock index has tumbled since early December and plunged more than four per cent on Tuesday, the first trading day of 1999, to close at a 29-month low.

Early Wednesday trade saw a dramatic dip below 6,000 points before buying by the massive state-led stabilisation fund and bargain hunters provided support to a modest rebound. The benchmark index closed up 0.77 percent at 6,199.91.

But analysts said the rebound could be short-lived.

"Many investors who got trapped during the recent losses are likely to sell shares to take profit or decrease their losses," said Joe Chiou, vice president of Taiwan Securities Investment.

The index, which fell 21.6 per cent in calendar 1997, haslost a staggering one-third of its value since its 1998 closing high of 9,277.08 on March 2.