Fri, Mar 30, 2007 - Page 12 News List

Central bank raises rates again

MILD INCREASE The bank said in a press statement that the increase was to ward off potential inflation risks as the direction of raw material prices remains uncertain

By Jackie Lin  /  STAFF REPORTER

As analysts had anticipated, the central bank yesterday announced it will increase the benchmark interest rate for the 11th straight quarter by 0.125 percentage points, effective today, to drive up low real interest rates.

The latest rate increase will see the rediscount rate, charged to commercial lenders, stand at a five-year high of 2.875 percent.

The rates on accommodations with collateral and accommodations without collateral will also increase to 3.25 percent and 5.125 percent, respectively.

"After the adjustment, interest rates are getting much closer to the neutral level compared with last time [in late December]," central bank Governor Perng Fai-nan (彭淮南) said during a press conference after the bank's quarterly board meeting yesterday.

"But we cannot say it's approaching a peak," he stressed, referring to a report published two weeks ago that had misinterpreted previous remarks.

The rate increases are to ward off potential inflation risks as the direction of international raw material prices remains uncertain and the nation's housing prices have jumped 20 percent since mid 2003, the bank explained in a press statement.

The central bank has adjusted its forecast for the consumer price index (CPI) down this year, from 1.75 percent to 1.5 percent, still higher than last year's 0.6 percent increase due to favorable weather.

The Directorate General of Budget, Accounting and Statistics (DGBAS), the government's statistics bureau, put its CPI forecast figure at 1.43 percent this year.

Asked whether the central bank is concerned that the property market is overheating, Perng reiterated that Taiwan's real estate price increases are mild compared with other nations.

Prices of second-hand properties remain fairly stable, but those of newly built projects have seen dramatic price increases especially if they are situated in popular locations, he said.

Perng said the central bank will auction off long-term certificates of deposit on a regular basis to absorb surplus capital in the market. The average savings rate over the past decade stood at 25.8 percent, higher than the investment rate of 20.7 percent, which has created a savings glut.

Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank Taiwan Ltd, expected one to two more rate hikes, depending on CPI fluctuations, as real market rates are still low.

"If international oil prices return to US$70 a barrel this summer, the central bank might edge up interest rates two more times before halting its successive rate increases," he said.

The US Federal Reserve has kept its key short term interest rate anchored at 5.25 percent for six straight meetings. Still, the interest rate spread between Taiwan and the US is only narrowing at a snail's pace due to the nation's small rate hikes, Cheng added.

Deutsche Bank said yesterday that it was surpised by the central bank's move.

"Weakening growth momentum as well as upward pressure on the New Taiwan dollar because of interest rate differential with the Fed Funds rate will weigh high on the central bank monetary stance and in response, we expect rate cut in the second half of the year," the bank said.

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