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 (
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 (
Echoing Cheng, JP Morgan Chase Bank's economist Grace Ng (
"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 (
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