Central bank raises interest rate

With the real interest rate still negative, the nation's central bank yesterday announced that it will raise the benchmark interest rate for the ninth straight quarter by 0.125 percentage points.

The decision to hike rates takes effect today, boosting the bank's rediscount rate to 2.625 percent, while lifting the secured accommodations rate and the unsecured loan rate to 3 percent and 4.875 percent respectively.

The authority has ratcheted up its benchmark interest rate by a cumulative 1.25 percentage points since October 2004.

"Despite the nation's sagging domestic demand and a mild increase in the consumer price index [CPI], the real interest rate is still lower than the neutral level and the bank's board of directors believes a fine-tuning approach [increasing the interest rate] is conducive to guarding against possible inflation," central bank governor Perng Fai-nan (彭淮南) said during a press conference following the board's quarterly meeting yesterday afternoon.

The central bank predicted that the CPI growth rate could be maintained at 1.5 percent this year, lower than the Directorate General of Budget, Accounting and Statistics' estimate of 1.8 percent, citing falling crude oil prices and a higher comparison base last year.

The bank's main concern for the moment is to steer the negative real interest rate -- the value of the prime rate minus the CPI -- back to a neutral level, Perng said.

Asked how closely the rate had approached the neutral level, Perng refused to elaborate, saying only that "it is moving closer to the neutral level step by step," leaving the door open for another rate hike in December.

"We'll monitor the CPI's fluctuations closely in the future to map out suitable monetary policies," Perng said.

The government's statistics agency predicted that the nation's economy will expand by 4.28 percent this year, up from last year's rate of 4.03 percent.

But domestic demand will only contribute 1.1 percentage points to the economic growth rate as private consumption has weakened dramatically as a result of the consumer loan crisis. Robust exports will account for the lion's share of 3.18 percentage points.

Chen Miao (陳淼), a researcher at the Taiwan Institute of Economic Research (台經院), said he was not surprised at the central bank's decision to raise the interest rate because the bank has to consider the majority of consumers who deposit money in local commercial banks, only to find their assets are shrinking due to the low interest rate.

As a result, Chen saw further rate increases ahead.

He predicted another 0.125 percentage point increase in December on the basis of a better-than-expected business outlook and bullish external trade in the fourth quarter.

In addition, private consumption is expected to rebound by the end of the year, he added.

On the currency front, Perng expressed confidence in the New Taiwan dollar, saying that exchange rate movements against the greenback are stable, fluctuating between NT$31.3 and NT$33 to the US dollar.

The NT dollar yesterday closed down NT$0.034 at NT$32.992 against the US dollar in Taipei.