Mon, Aug 08, 2005 - Page 10 News List

Central bank feels pressure to up rates

RATCHETING UP Rising oil prices, higher inflation and the US Fed's rate hikes are all combining to push the nation's central bank to raise interest rates next month

CNA , TAIPEI

Pushed by continuously rising oil prices and an expected new hike in interest rates by the US Federal Reserve next week, the nation's central bank has come under stronger pressure to raise interest rates next month, economists said Saturday.

But the bank said it will closely watch the impact of the soaring oil prices on domestic consumer product prices before making a judgment, according to Shih Yen (施燕), director-general of the Economic Research Department at the Central Bank of China (CBC).

Although fuel increases account for much of the consumer prices index (CPI) rise and usually leads to immediate consumer product price changes, Shih said that it remains to be seen whether electricity and public utility rates will be adjusted upwards in the near term and whether a string of flow-on effects will follow.

The central bank may raise key interest rates amid potential inflation risks, a Chinese-language newspaper reported Saturday, adding that the bank may soon raise its benchmark interest rate by an eighth to a quarter of a percentage point.

According to the latest tallies published by the Cabinet-level Directorate General of Budget, Accounting and Statistics, the CPI moved up by an average of 1.92 percent for the first seven months of this year, still lower than 2 percent. The central bank has forecast the nation's inflation may reach about 2 percent this year.

In addition, the US Fed's continued interest rate hikes have also put the CBC under greater pressure to follow suit in the second half of this year, a bond expert said, adding that it is very possible that key US interest rates will be lifted to around 4 percent by the end of this year, exceeding the market's previous evaluation of a range between 3.5 percent and 3.75 percent.

He contended that the US rate hikes will impact the CBC's monetary policy and claimed that the CBC will do so very probably next month now that domestic fuel oil prices were adjusted last week.

National Chengchi University Professor Chu Hao-min (朱浩民) said that the historically high oil prices should be a short-term phenomenon. But even so, businesses might have passed on the costs to consumers.

Despite the fact that the nation's economic performance has been lackluster this year, evidenced in its slowed economic growth rate and shrinking trade surplus which squeeze the space for the CBC to make rate increases, Chu said that the central bank might opt to do so by a half quarter point in the coming months.

The central bank on June 30 raised its benchmark interest rate for a fourth successive quarter, saying inflation may exceed the official 1.7 percent forecast this year.

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