Fri, Mar 25, 2005 - Page 10 News List

Interest rate hikes come as no surprise to market watchers

MILD INCREASE The central bank's decision to raise interest rates means that it is not worried about foreign capital flight, market analysts say

By Lisa Wang  /  STAFF REPORTER

The central bank's mild hikes in the nation's key interest rate increase yesterday suggested that the bank is not worried that a slower pace than the US's Federal Reserve would trigger massive outflows of foreign capital back to the US, analysts said yesterday.

The central bank yesterday announced it will increase Taiwan's benchmark interest rates by an eighth of a percentage point to 1.875 percent to curb inflation speculation, amid rising oil prices and possible increases in water and electricity costs later this year.

The central bank's decision yesterday was in line with market watchers' expectations.

"The central bank's decision matched our expectation as policy makers aim to curb speculation on higher consumer prices due to the rising cost of oil," said Citibank Taiwan vice president Cheng Cheng-mount (鄭貞茂).

"As inflation would not be a threat in the medium or longer term, we expect a more gradual rate hike," Cheng said.

The bank's interest rate hike yesterday was the monetary policy body's third straight hike since September last year. The central bank yesterday said Taiwan's consumer price index could rise above the government's previous forecast of 1.67 percent.

The bank's cautious move indicated that it is not worried about possible outflow of foreign capital after the US Federal Reserve raised US interest rates by a full quarter of a percentage point.

"Foreign investors have remitted a massive amount of capital into Taiwan this year," Cheng said.

Before yesterday's hikes, interest rates for six-month dollar deposits were 1.135 percent lower than that of US dollar deposits. Local lenders, including Taiwan Bank (台灣銀行), said they would hold on to deposit interest rates for one day on flush NT dollar liquidity.

Chou Ji (周濟), director of the private think-tank Chunghwa Institution for Economic Research, also said the central bank did not purport to stop further outflow of foreign funds.

If the central bank hopes to prevent further outflows of foreign funds, the rate hikes must be bigger than 0.25 percentage points, Chou said.

Kevin Chung (鐘國忠), an analyst with Jih Sun Securities Investment Consulting Co (日盛投顧), said overseas fund managers are diverting their funds away from Asian markets, including Taiwan, taking advantage of the widening interest rate gap between the US and Asian nations.

"But, foreign investors' moves will not send the local stock markets into a decline as the volume is quite small," he said.

As of yesterday, foreign investors sold a net NT$20.75 billion of local stocks since the beginning of March, compared to a net purchase of NT$114.48 billion in February.

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