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Central bank expected to follow Fed's lead next month

The central bank may raise its key interest rates for the fourth straight quarter next month, following the US Federal Reserve's hiking its short-term federal funds rate by 25 basis points to 3 percent on Tuesday, economists said yesterday.

"I think the central bank will match the hike and raise its rediscount rate next month by 0.125 percentage points from the current 1.875 percent to 2 percent," said Cheng Cheng-mount (鄭貞茂), vice president of Citibank Taiwan.

The last time the central bank lifted its rediscount rates was on March 24, when it raised them by 0.125 percentage points to 1.875 percent, due to concerns over inflation and the low level of real interest rates (nominal rates adjusted for inflation).

Cheng predicted that the Fed will raise its benchmark interest rate to 3.75 percent for the next half year and end the year at 4 percent.

As Taiwan typically follows US monetary policy, he expects the central bank will hike its rediscount rate to between 2 percent and 2.125 percent by the end of the year.

Such an adjustment would keep the interest spread between domestic and foreign markets close, as well as to turn the current negative real interest rates -- the value of the prime lending rate minus the consumer price index -- to a normal level, in order to ease inflationary pressure, Cheng said.

Wu Chung-shu (吳中書), an economics researcher at Academia Sinica, also thinks the central bank will hike interest rates considering rising consumer prices and the growing interest rate spread.

"But the bank will take a measured way to lift the rate as it doesn't want to hurt the nation's already weakened economy," Wu said.

The Directorate General of Budget, Accounting and Statistics has forecasted an economic growth rate of 4.21 percent for this year, down from 5.71 percent last year.

Also see story:
Fed raises US interest rates to 3 percent
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