The central bank is expected to continue its series of rate hikes by lifting benchmark interest rates another 0.125 percentage points this week to stem capital outflows and counter the weak NT dollar, analysts said over the weekend.
The bank has raised rates for 11 consecutive quarters since October 2004. The last rate increase, announced in late March, saw the rediscount rate charged to commercial lenders stand at a five-year high of 2.875 percent.
The central bank is scheduled to hold a quarterly meeting on Thursday to discuss its monetary policy.
The bank will have to hike rates as extensive capital outflows, which are caused partly by the nation's low rates, continue to weaken the NT dollar, said Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院).
"Between the interest rates and exchange rates, the central bank is more concerned about the latter," Liang said.
Over the past few weeks, the monetary policymaker has reportedly intervened in the exchange market several times to keep the local currency from depreciating below the NT$33.4 benchmark against its US counterpart, market watchers allege.
"Were it not for the central bank's intervention, the NT dollar would have gone above NT$34 and even moved toward NT$34.5 per US dollar," Liang said.
The currency lost NT$0.057 to close at NT$33.142 against the greenback on Friday.
To manage exchange rates, the central bank will have to raise interest rates.
Peter Sutton, head of CLSA Asia Pacific Market's research division, said at a recent presentation that higher interest rates are required to stabilize the NT dollar and the property market can withstand a rise of 0.5 percentage points.
Sutton did not say whether he thought this would happen.
As for possible inflationary pressure, Cheng Cheng-mount (鄭貞茂), chief economist and vice president of Citibank Taiwan Ltd, said this remains a concern in the central bank's policy-making decisions.
He said he expected the bank to hike rates another 0.125 percentage points as domestic demand is mild and said an aggressive rate increase move was not necessary.
In March, central bank Governor Perng Fai-nan (
The central bank has adjusted its forecast for the consumer price index (CPI) down this year from 1.75 percent to 1.5 percent, which is higher than last year's 0.6 percent increase due to favorable weather.
Liang, however, differed.
He said inflation would not be an issue as the CPI only rose 0.72 percent during the period from January to last month from a year earlier.
He also said the core price index was up by 0.68 percent, according to figures from the Directorate General of Budget, Accounting and Statistics (DGBAS).
DGBAS earlier put its CPI forecast figure at 1.43 percent for the year, falling short of the warning level at 2 percent.
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