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TIER downplays inflation risk

Despite soaring oil prices, there is no immediate risk of inflation, especially after the government gave the assurance that utilities rates will be kept at current levels, the Taiwan Institute of Economic Research (TIER, 台經院) said.

Under government pressure amid concerns over inflation, the state-run Chinese Petroleum Corp (CPC, 中油), the nation's largest oil refiner, has promised not to raise its prices as long as global crude oil prices remain under US$60 a barrel.

As for fears about a possible hike in water and electricity prices, which would drive up the Consumer Price Index (CPI), David Hong (洪德生), the research institute's acting president, told a press conference yesterday that this pressure has vanished since the Ministry of Economic Affairs decided to postpone rate hikes to help ease commodity prices.

"With the government's pledge to stabilize consumer prices, I think the threat of inflation does not exist," Hong said.

TIER predicts that the CPI could rise to 1.87 percent this year, which Hong said is still safe and lower than that of neighboring countries.

The central bank on Thursday lifted its benchmark interest rates for the third straight quarter by 0.125 percentage points out of concern over inflation. The bank said that the rising commodity prices may result in the CPI rising beyond the government's forecast of 1.67 percent for this year.

One uncertain factor is China's economic expansion, which is still faster than expected and may drive up prices of raw materials and drive up the CPI, Hong said.

He also predicted that the central bank will continue to raise interest rates to keep up with the US rates, but said that such adjustments would probably not be sharp or frequent to avoid hurting the already slow domestic economy.

The New Taiwan dollar has turned weak against its US counterpart this week due to foreign investors' sales of Taiwanese shares, but Hong said the local currency is likely to rise in the long term, as foreign capital is expected to flow in after Morgan Stanley Capital International Inc adjusted its evaluation of the benchmark TAIEX upward in May, and the FTSE Group classified Taiwan as a "developed market."

According to a poll conducted by TIER last month, local manufacturers turned optimistic about the nation's economic outlook in the next half of the year.

The survey showed that 54.6 percent of manufactures said they were positive about the economy, up from 26.9 percent in the previous survey, while only 8.5 percent said they were pessimistic, down from 18.2 percent.

The research institute attributed the cheerful sentiment to the political reconciliation among the ruling and opposition parties, as well as Premier Frank Hsieh's (謝長廷) determination to boost the economy.

But the high spirits may be deflated by China's passage of its "Anti-Secession" Law, Hong said.

"I think the law will have a limited effect on Taiwan in the short term, but it's a latent crisis in the long-run that may impact on local and foreign investment to the nation," Hong said.
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