Thu, Oct 27, 2005 - Page 10 News List

Central bank explains rate-hikes plan

CHEATING INFLATION Benchmark interest rates will continue to be adjusted to offset any movements in commodity prices and interest rates, the central bank said yesterday

By Jackie Lin  /  STAFF REPORTER

The nation's top monetary policy-making body yesterday reiterated its stance that benchmark interest rates will be adjusted upward at appropriate times to stabilize commodity prices and reverse "negative" real-interest-rate trends back to a "normal" level.

Since October last year, the central bank has hiked interest rates five times by a total of 0.75 percentage points.

However, as the interest-rate spread between Taiwan and the US is likely to expand further with the US Federal Reserve showing no sign of halting its drive of raising rates, lawmakers yesterday expressed concern about whether the central bank will speed up its decision to follow suit.

Perng Fai-nan (彭淮南), governor of the central bank, said in the legislature's financial committee meeting that the bank's monetary policies are made through group decisions and maintaining stable commodity prices is a priority.

Taiwan's consumer price index (CPI) during the first nine months stood at 2.24 percent. Excluding vegetables, fruit and energy costs, the core CPI growth remained within an "acceptable" range at 0.99 percent, Perng said.

"If the CPI continues to climb, the central bank will adopt the necessary measures [to counter this]," he told lawmakers, without elaborating how the bank will act.

According to the bank's report prepared for yesterday's meeting, the nation's real interest rate is a negative 0.34 percent, based on the one-year deposit rate at five major banks of 1.79 percent minus the central bank's projected inflation rate of 2.13 percent for the year.

"The bank's monetary policies must be adjusted to gradually bring the real interest rate back to a normal level," the report said.

The policy maker usually announces its decision on interest-rate changes after the quarterly meetings. Its previous move to hike interest rates was on Sept. 15 when it raised rates by 0.125 percentage points for the fifth consecutive quarter. The next policy meeting is scheduled for December.

Another key issue addressed yesterday is fluctuation of the New Taiwan dollar. People First Party Legislator Christina Liu (劉憶如) asked whether the NT dollar has been depreciated to help boost the nation's weakening exports.

Perng said that exchange rates must be decided by basic economic factors, especially supply and demand, to maintain flexible and absorb "shocks."

He said that whether the NT dollar performs weakly can be decided by comparing the exchange rates of Taiwan's major trading partners, including the US, Japan, Europe and South Korea.

On Tuesday, the NT dollar depreciated against South Korea's won and the Chinese yuan by 7.36 percent and 2.09 percent, respectively, from a year ago. However, during the same period, the NT dollar showed appreciation against the Japanese yen, the euro and the greenback of 7.64 percent, 4.94 percent and 0.16 percent, respectively, according to the central bank's statistics.

Furthermore, the NT dollar's weighted average exchange rate against major trading nations' currencies rose 1.68 percent on Tuesday from the previous year and 4.13 percent during the first nine months year-on-year, showing the local currency's continuing strength, the bank said.

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