Tue, Feb 06, 2007 - Page 12 News List

Moderate inflation likely to lead to interest rate freeze

BLOOMBERG

Taiwan's inflation held below 1 percent for the seventh month and spurred speculation that the central bank could pause next month after raising interest rates at every review since September 2004.

Consumer prices rose 0.4 percent last month from a year earlier, after climbing a revised 0.71 percent in December, Taiwan's bureau of statistics said in a statement in Taipei yesterday.

Tame inflation and a forecast of slowing economic growth could lead the central bank to pause on rate increases. Policy makers have raised borrowing costs to stem outflows of money and keep the currency stable. Taiwan's benchmark rate remains about half the US Federal Reserve's 5.25 percent.

"I see no valid reason for the central bank to raise rates in March," said Johnson Hsu, an economist at Jih Sun Securities Ltd (日盛證券). "January's inflation was quite moderate." Wholesale prices rose 7.2 percent after gaining a revised 6.4 percent in December, the statistics bureau said.

The bureau in November forecast the nation's economic growth would fall to 4.14 percent this year from an estimated 4.39 percent last year because of slowing exports. Overseas sales represent approximately half of Taiwan's economy.

The central bank raised the benchmark interest rate to a five-year high of 2.75 percent in December, the lowest among Asian countries except Japan. The central bank increased the key rate by 12.5 basis points at each of the past nine quarterly meetings.

"Taiwan's inflation is under control for the moment," said Ma Tieying, an economist at DBS Bank in Singapore, before the announcement. "As growth is slowing and inflation pressure is so moderate, the central bank could pause its rate hikes." Still, the central bank could "prefer to normalize its interest rates to a neutral level" rather than call a temporary halt to increases, Ma said.

Governor Perng Fai-nan (彭淮南) said last month that the benchmark rate had yet to reach the "neutral level" where it neither fuels nor curbs inflation and growth, suggesting more rate rises.

Core consumer prices, which exclude food and energy costs, fell 0.09 percent last month from a year earlier after climbing a revised 0.68 percent in the previous month.

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