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Experts divided on interest rate hikes

Although the US is expected to stick to its policy of gradual interest rate hikes to combat inflationary pressure, economists disagreed on whether Taiwan's central bank will follow suit.

While some analysts expect the bank to continue a policy of monetary tightening by raising rates this week, the situation is complicated by the economic slowdown, which puts pressure on the bank to keep rates lower in order to stimulate growth.

The nation's central bank is slated to hold its quarterly meeting on Thursday to review its monetary policy.

"We expect the central bank to increase its benchmark interest rates by 0.125 percentage points as before," Cheng Cheng-mount (鄭貞茂), chief economist of Citigroup in Taipei, told the Taipei Times in a phone interview last week.

Citigroup and some others expect the central bank to follow in the footsteps of the US with a mild tightening policy to deal with the looming inflationary pressure driven by likely hikes in utilities fees. At the same time, the bank has to take into account the economic slowdown and increasing costs to borrowers as the amount of the nation's consumer loans has expanded in the last few months, Cheng said.

In late March the central bank lifted its benchmark interest rates for the third straight quarter by 0.125 percentage points amid worries about the low level of real interest rates, or interest rates minus the rate of inflation. The bank hiked its rediscount rate to 1.875 percent while boosting the secured accommodations rate and the unsecured loan rates to 2.25 percent and 4.125 percent.

Inflation picked up sharply last month on the back of higher food and oil prices with the consumer price index (CPI) rising 2.3 percent year-on-year and 0.21 percent month-on-month, seasonally adjusted, according to data from the Directorate General of Budget, Accounting and Statistics (DGBAS), after gains of just 1.61 percent and 0.15 percent in April.

Both the government's softening stance on allowing retail gasoline price hikes and possible hikes on electricity fees could fuel inflationary pressure, Cheng said.

The government has become more flexible on gas prices in light of skyrocketing oil prices. Crude oil for August delivery advanced for the second day to US$60 a barrel on Friday, its highest level since such contracts started trading in the New York Mercantile Exchange in 1983. The state-run Chinese Petroleum Corp (中油) may hike its retail gasoline prices once crude oil prices remain at more than US$60 per barrel for seven to 10 consecutive days, CPC President Chen Bao-lang (陳寶郎) said on Friday.

Echoing Cheng, JP Morgan Chase Bank's economist Grace Ng (吳向紅) predicted that the bank may nudge benchmark rates by 0.125 percentage points on Thursday, citing the bank's goal of leading real interest rates back from negative territory to a "normal" level.

"But the likelihood is smaller than before ... and we won't be surprised if the central bank chooses not to do it, considering [the nation's] weakening economic growth [this year]," Ng said in a phone interview.

Looking ahead, both Cheng and Ng predicted the bank to lift the rates twice more by 0.125 percentage points each by the end of the year.

Liang Kuo-yuan (梁國源), president of the Taipei-based Polaris Research Institute, disagreed, saying that the possibility for rate hikes is slim.

"The nation's economic slowdown trumps the inflation issue, especially when there is no imminent inflationary pressure seen in Taiwan at the moment," Liang said, adding that only a CPI increase surging above 2.5 percent would signal impending inflationary pressure.

Skyrocketing oil prices are less likely to fuel inflation than to dampen economic growth, which in turn hurts Taiwan's exports, he said.

"The economic performance in the manufacturing and export sectors fell below expectations in the first half of this year, so the adoption of tighter [monetary] measures will not meet the country's needs," the economist stressed.

Taiwan's first-quarter GDP growth slowed to just 2.54 percent in the first quarter, down from 3.25 percent in the previous quarter. That was the lowest level since the second quarter of 2003, when the SARS epidemic hit Taiwan.

The anemic performance led DGBAS to cut its growth forecast for this year to 3.63 percent from its previous prediction of 4.21 percent.

Second-quarter economic growth is expected to be even weaker than in the first quarter, and therefore Taiwan needs economic growth of more than 4 percent in the second half of the year to achieve annual growth of around 3.5 percent, Liang said.

"This means that a tight monetary policy that could hinder the chances of an economic rebound is not what we need and want," he said.

Holding a similar view, the Taiwan Institute of Economic Research (台經院) said last week that it did not expect rate hikes by the central bank because of the need to stimulate economic growth in light of poorer-than-expected growth in the first half of this year.
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