Tue, Jan 17, 2006 - Page 10 News List

Deutsche Bank predicts more hikes

By Amber Chung  /  STAFF REPORTER

The central bank is expected to keep raising interest rates throughout the year in a bid to reduce the rate spread with the US and to turn the real rates back to a normal level, Deutsche Bank said yesterday.

The central bank will continue to hike its benchmark rates each quarter for a total of 0.5 percentage points, boosting the rediscount rate charged to commercial lenders to 2.75 percent at the end of this year, Michael Spencer, Deutsche Bank's chief economist for Asia, said in a briefing in Taipei yesterday.

Despite the slowing down of inflation -- with the consumer price index anticipated to drop to 1.3 percent this year from 2.4 percent last year -- continuous rate increases will be made to restore rate differentials versus the US to near parity and to help real rates return to a normal standard, he said.

The central bank increased rates by 0.125 percentage points for a sixth straight quarter late last month, bringing its rediscount rate to 2.25 percent. It lifted the secured accommodations rate and unsecured loan rate to 2.625 percent and 4.5 percent, respectively.

The bank has hinted of further rates hikes in light of negative real short-term interest rates that are still below neutral levels.

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.

Deutsche Bank's prediction, however, differs from market consensus views. For instance, Citibank Taiwan expects rate hikes to conclude after one more increase of 0.125 percentage points at the end of the current quarter, while the Taiwan Institute of Economic Research (台經院) said there would be no more hikes after the end of the second quarter.

Meanwhile, the German bank expects the NT dollar to strengthen by 3 percent to 4 percent to NT$31.5 against the US$1 by the year-end.

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