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Central bank may increase rates

The central bank could raise interest rates at least one more time before a pause in its measured tightening policy of the past two-and-a-half years, to cool down speculation in the property market without hurting fragile domestic consumption, analysts said.

"We expect the central bank to raise its benchmark interest rates by 12.5 basis points as usual this month," Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank, Taiwan, said by telephone yesterday.

The predicted rate hike will bring the rediscount rate charged to commercial lenders to 2.875 percent if it materializes.

The central bank is scheduled to hold a quarterly meeting on next Thursday to discuss its monetary policy in the wake of 10 interest rate increases in succession since October 2004.

Citibank expects one more rate increase as the central bank would want to bring real interest rates -- the rate after removing the impact of inflation -- to a "neutral level" while trying to rein in speculative trading on the real estate market, Cheng said.

However, there is shrinking likelihood of further rate hikes, as central bank Governor Perng Fai-nan (彭淮南) has hinted at a more neutralized interest rate level, and considering the nation's relatively slow economic growth and weak domestic consumption, Cheng said.

Citibank forecasts the nation's inflation rate to stand at 1.5 percent this year, which is mild, Cheng said.

The move to bring an end to the long monetary tightening cycle in Taiwan would be in line with other central banks worldwide, except Japan, against a backdrop of a decelerating global economy, the economist said.

Citibank anticipates the US Federal Reserve to start lowering Fed fund rates in the third or fourth quarter of this year, while others, such as BNP Paribas, are predicting total rate cuts this year to be as much as 50 basis points, starting as early as next month.

Meanwhile, Goldman Sachs said it expected the nation's central bank to continue to raise rates two more times by the end of the first half of this year, with an increment of 12.5 basis points each time.

"The reason we think the central bank would still hike rates is to attempt to guide money market rates higher," Goldman Sachs' economist Enoch Fung said in a report released last week.

Otherwise, a "pause" by the central bank could be viewed by the market as a signal that the central bank is content that a "neutral level" is being maintained with the current historically-low level of real interest rates, which could create instability and a capital flight, Fung said.

Nonetheless, whether or not the central bank increases rates has become irrelevant for the market because market interest rates are expected to continue to lag behind official rates in the near term, he said.

The economist said that money market rates would only rise if the market saw a visible credit demand recovery in the second half of this year, underpinned by a low real interest rates environment.
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