Fri, Jun 22, 2007 - Page 12 News List

Benchmark rate rises 25 basis points

FUND ALLOCATION Central bank Governor Perng Fai-nan also announced that the required reserve ratio on foreign currency deposits would be increased to 5 percent

By Jackie Lin  /  STAFF REPORTER

The central bank yesterday announced it would increase the benchmark interest rate by a larger-than-expected 0.25 percentage points, effective today, to ward off potential inflationary risks looming in the second half of the year.

It is the 12th quarter in succession in which the central bank has hiked rates.

The latest move will raise the discount rate, the rate on accommodations with collateral and the rate on accommodations without collateral to 3.125 percent, 3.5 percent and 5.375 percent respectively.

The central bank also declared that the required reserve ratio on foreign currency deposits will be substantially lifted from 0.125 percent to 5 percent, effective today, to strike a balance with the reserve ratio on local currency deposits at 5.3 percent, central bank Governor Perng Fai-nan (彭淮南) said during a press conference after the bank's quarterly board meeting yesterday.

Although the new policy will increase costs for specialized foreign exchange banks, Perng said it would be conducive to a more reasonable allocation of funds.

The governor added that the bank's decision to hike rates by 25 basis points was aimed at fighting a rising consumer price index (CPI).

For the first five months of the year, the nation's CPI and core CPI rose by 0.72 percent and 0.68 percent respectively year on year, while the wholesale price index (WPI) rose significantly by 7.39 percent from a year earlier.

But as international raw material price hikes gradually trickle into general prices and with a lower comparison base for the July-to-December period, the CPI is expected to rise by 1.93 percent in the second half of the year, compared with a CPI increase of 0.99 percent in the first half, Directorate General of Budget, Accounting and Statistics (DGBAS) data showed

The DGBAS forecast that consumer prices for the full year would rise 1.46 percent.

Other factors behind the rate increase include rising market rates and expectations that the nation's economic growth would rise in the second half of the year and that monetary growth would remain at appropriate levels, the bank said in a press statement.

The DGBAS predicted that GDP growth would rise from 4.27 percent in the first half to 4.48 percent in the second half.

On whether interest rates had approached a neutral level, Perng dodged the question, saying that the bank "will adjust its monetary policies by taking future price fluctuations into account," and that the rate movement would reflect market conditions.

Perng again called on financial institutions to strengthen risk management and inform customers in full of the risk involved in transactions of financial products, including exchange rates, interest rates and liquidity risks.

While some are concerned that rising interest rates could affect the property market as the mortgage burden for homebuyers grows heavier, Sinyi Real Estate Inc (信義房屋) said the impact would be limited as mortgage rates would not follow suit straight away.

For every 0.25 percentage point increase in interest rates, loan costs for homebuyers per NT$1 million (US$30,370) will rise by NT$127 per month, which would not constitute an evident effect, the nation's largest housing agent said in a press statement yesterday.

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