Central bank pressured to raise rates

SOME CUSHION: Taiwan’s GDP is forecast to grow more than 11 percent this year, so the economy should be able to absorb the impact of a rate hike, an expert said

With domestic inflation topping the 2 percent alert level for a fourth consecutive month last month and several major central banks around the world raising their key interest rates, Taiwan’s central bank is facing growing pressure to raise rates at its quarterly policymaking meeting on Thursday, economists said.

At its June meeting, the central bank left interest rates unchanged for the ninth consecutive quarter, with the discount rate at 2 percent.

Central Bank Governor Yang Chin-long (楊金龍) had said that the bank maintained a somewhat hawkish stance, with two board directors voicing support for a rate hike at the meeting.

A staff member stands near the central bank logo in Taipei on Feb. 26, 2018.

Photo: Tyrone Siu, Reuters

Cathay United Bank Co (國泰世華銀行) chief economist Lin Chi-chao (林啟超) last week said that the central bank had forecast in June that the consumer price index (CPI) would rise by less than 2 percent this year.

However, the situation has since changed, as international crude oil prices have risen amid escalating tensions in the Middle East, he said.

“Inflationary pressure has been on the rise,” Lin said, citing a forecast by the Directorate-General of Budget, Accounting and Statistics last month that CPI would increase 2.07 percent this year.

The central bank must also take into account the monetary policy moves of other major central banks when deciding whether to adjust interest rates, he said.

The Bank of Korea hiked its benchmark interest rates for a second consecutive time last month to 3 percent, Lin said.

The European Central Bank raised its key interest rates by 25 basis points last week, marking its second rate hike this year, he said, adding that there was a high possibility that the Bank of Japan would raise rates this week.

More importantly, the US Federal Reserve could raise rates this week, with the odds rising to nearly 90 percent after last month’s CPI data showed persistent inflationary pressure, Lin said.

“Whether considering domestic conditions or the international situation, the interest rate hike checklist has been fully checked,” Lin added.

With GDP growth forecast to top 11 percent this year, the economy is expected to be able to absorb the impact of a rate hike, Lin said.

Taiwan Institute of Economic Research Economic Forecasting Center director Gordon Sun (孫明德) said he expects the Fed to raise rates this week, which could serve as an indication for Taiwan’s central bank to follow suit.

If Taiwan’s rates remain unchanged, there would be a wider interest rate spread between Taiwan and the US, which is an important factor to consider, Sun said.

A central bank rate hike would not primarily be aimed at curbing inflation, but at addressing tightening liquidity in the local market, Sun added.

Fund demand has increased as companies step up investments amid the artificial intelligence (AI) boom, while high-flying stocks have boosted demand for funds, further tightening liquidity, he said.

Tight liquidity has pushed up market interest rates, so the central bank needs to respond by raising its key interest rates, he added.

However, Sun also raised concerns about a rate hike, saying Taiwan’s strong economic growth is largely driven by AI development, while the traditional economy has lagged behind, so higher interest rates could place a heavier financial burden on traditional industries.