Central bank likely to raise rates further: Citigroup

The central bank is expected to hike interest rates again three months from now, but higher interest rates will not help banks' shrinking margins in light of fierce competition in the banking business, Citigroup Global Markets Inc said yesterday.

Citigroup's chief economist in Taiwan, Cheng Cheng-mount (鄭貞茂), expects the central bank to raise the benchmark rate by another 12.5 basis points in September, a report released yesterday said.

Further rate hikes will depend on official assessments of growth and inflation risks, as well as developments in the financial markets, particularly on the direction of the NT dollar, it said.

The central bank last week raised its benchmark interest rate 25 basis points to contain inflationary pressures in the second half of this year.

"Rate hikes are bad -- we estimate aggregate profits to fall 2.2 percent for every 25 basis points hike in benchmark rates, with government banks worst hit given their low loan-to-deposit ratios," Citigroup Global Markets analyst Bradford Ti (鄭溫煌) said.

The loan-to-deposit ratio gauges a bank's idle capital, with a lower figure indicating less lending and fewer interest income.

Forecast aggregate profits of the 11 banks covered by the US brokerage house, including Mega Financial Holding Co (兆豐金控), Cathay Financial Holding Co (國泰金控) and Chang Hwa Bank (彰化銀行), would be pared nearly NT$3 billion (US$91.5 million) for every 25-basis-point hike in the benchmark rate,Ti said.

Given the heated competition, banks will have difficulty passing on rising costs to consumers, Ti said.