Fri, Dec 23, 2005 - Page 10 News List

Bank bumps up interest rates again

SIXTH INCREASE The central bank raised rates by 0.125 percentage points, saying a `tolerable' level of CPI growth prompted the `gradual' pace of change

By Amber Chung  /  STAFF REPORTER

The nation's central bank yesterday announced it would raise its benchmark interest rates -- for the sixth straight quarter since September last year -- in a bid to contain inflationary pressure and move real interest rates to a "neutral" level.

In line with market expectations, the bank increased rates by 0.125 percentage points, bringing its rediscount rate charged to commercial lenders to 2.25 percent. It boosted the secured accommodations rate and unsecured loan rate to 2.625 percent and 4.5 percent, respectively. The hikes take effect today.

"Given that the [January to November] core consumer price index [CPI] growth of 0.67 percent remained tolerable, we decided to adopt a moderate and gradual pace to adjust our monetary policy," central bank governor Perng Fai-nan (彭淮南) told a press conference after the bank's quarterly meeting yesterday evening.

Inflation?

Looking ahead, inflation could be a threat, possibly driven by unpredictable oil prices, a planned higher tax on cigarettes and a likely rise in utilities fees, according to Perng.

Moreover, real short-term interest rates are currently negative, and there is still some way to go to return them to a "neutral" level, he said.

The governor declined to say whether his remarks indicated that further rate hikes would follow next year, saying that would depend on a consensus decision by the bank's board.

The real interest rate refers to the nominal interest rate minus inflation. In a negative interest-rate environment, savings account holders and investors lose real purchasing power and their real wealth gradually shrinks.

The central bank's forecasts for next year's inflation and economic growth are similar to the Directorate of General Budgets, Accounting and Statistics (DGBAS). The DGBAS expects the nation's CPI to drop to 1.52 percent next year from 2.31 percent this year, with economic growth to rise to 4.08 percent from 3.8 percent over the same period.

The US Federal Reserve (Fed) last week raised its benchmark Fed-funds rate by a quarter point -- the 13th consecutive hike since June last year -- to 4.25 percent, to address looming inflationary threats. Meanwhile, the Fed hinted at a possible end to its measured tightening policy.

More increases ahead

Local economists, however, do not expect the nation's central bank to follow the Fed's move. Instead, they expect further rate increases to occur next year.

"This will not be the last time," Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank Taiwan Ltd, told the Taipei Times earlier this week. Cheng predicted another rate hike in March next year in light of a widening interest-rate spread between Taiwan and the US.

Chen Miao (陳淼), a researcher at the Taiwan Institute of Economic Research (台經院), who expected two more rate hikes of 0.125 percentage points each, said the bank would not stop raising interest rates until the end of the second quarter of next year.

Addressing the foreign exchange rate, the central bank said that the nation's currency remained stable, citing the NT dollar's year-to-date appreciation rate of 3.97 percent against its US counterpart.

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