Mon, Sep 25, 2006 - Page 12 News List

Economists split over rate hike

POLICY PREDICTIONS Some analysts think the central bank will increase rates in response to expected Q4 price hikes, but others expect the bank to hold off for now

By Jackie Lin  /  STAFF REPORTER

With inflationary pressure subsiding and the US Federal Reserve keeping rates unchanged for the second consecutive month last week, economists are divided on whether Taiwan's central bank will halt its rate hikes in its quarterly meeting to be held on Thursday.

The monetary policymaker has ratcheted up its benchmark interest rate by a cumulative 1.125 percentage points for eight straight quarters since October 2004.

"Although potential inflation risks look set to ease off and domestic demand is still flagging, I still expect the central bank to raise the rate by another 0.125 percentage points as a catalyst to boost declining market rates," said Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank Taiwan Ltd.

This should be the last time the bank boosts rates, he added.

Government statistics showed that the consumer price index (CPI), a key barometer for inflation, fell 0.57 percent last month from a year earlier on declining prices for vegetables and clothing, marking its first drop since December 2003.

However, as the CPI is forecast to expand by more than 2 percent year-on-year in the fourth quarter, it is imperative for the central bank to "take precautions" by hiking rates this week, Cheng said.

Otherwise, the bank might be criticized for inconsistent policy-making if it chooses to keep rates unchanged this quarter and is later forced to hike rates again in December, Cheng said.

Central bank Governor Perng Fai-nan (彭淮南) has reiterated several times that keeping CPI growth under 2 percent for the year is the bank's top priority.

The Directorate General of Budget, Accounting and Statistics predicted last month that the CPI would expand by 1.8 percent this year, while the Chung-Hua Institute of Economic Research (CIER, 中經院) in July predicted a figure of 2.19 percent.

Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院), held a different view, citing the rate spread with the US, money supply and the real interest rate -- three main factors the central bank uses for policy-making.

"There is a high probability that the bank will hold rates steady if it takes into account more CPI prediction results -- not just based on the statistics agency's forecast model," he said.

Since fewer typhoons this summer has meant less damage to crops, and the difficulty in passing additional costs on to commodity prices due to weak consumption, Polaris slashed its CPI forecast for the year from 1.87 percent in June to a mild 1.27 percent two weeks ago.

Shih Yen (施燕), director-general of the central bank's Economic Research Department, said on Sept. 12 that price increases appeared "safe" this year, adding that it was unlikely that whole-year CPI growth would surpass 2 percent.

Liang said Taiwan's rate spread with the US would not widen as the US Fed is widely expected to keep rates unchanged for the rest of this year.

In addition, Taiwan's money supply growth slowed in July as residents invested more funds overseas and growth in bank lending cooled, according to the central bank. M2, the broadest measure of money supply, rose 5.72 percent in July from a year ago after gaining 6.45 percent in June.

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