Mon, Jul 30, 2007 - Page 12 News List

Central bank likely to raise interest rates

FEELING THE PAIN Analysts say that the constant increase in the price of global raw materials could push the nation's inflation rate to 1.2 percent this year and 1.7 next year

By Amber Chung  /  STAFF REPORTER

To keep economic growth on track, the central bank could raise its key interest rates again in the second half of the year on looming inflation risk driven by rising prices of raw material, Standard Chartered Bank said.

The British bank said that unless the monetary policymaker faces renewed urgency to ward off speculative pressure on the NT dollar, the central bank would raise its benchmark interest rates 12.5 basis points in the current and next quarter to push the rediscount rate to 3.375 percent by the end of this year.

"Sustained high prices for raw material, including crude oil, are slowly finding their way into the Taiwanese economy and are likely to push inflation up next year," Standard Chartered economist Tony Phoo (符銘財) said in a report last week.

These developments could encourage the central bank to maintain its tightening bias in the coming quarters, but it is likely to slow down this process by imposing 0.125 percentage points hikes each time compared to the 0.25 percentage points hikes last month, Phoo said.

The economist said that the nation's core consumer price index, a major gauge of inflation risk, should double to a 1.2 percent annual growth rate this year and to 1.7 percent next year, as it responds to constant increase in global raw material prices.

Central bank Governor Perng Fai-nan (彭淮南) said last week that the bank was closely monitoring consumer prices and did not rule out convening any ad hoc board meeting to review the interest rates policy.

Last month, the bank lifted the benchmark interest rates by 25 basis points, the 12th quarterly hike in a row, to avert potential inflationary pressure.

However, Phoo said that exchange rates would be a more effective tool than monetary ones to restrain import-cost-driven inflationary pressures.

Rate hikes could severely undermine domestic liquidity and dent an already morbid consumption and investment demand, he said.

If market participants were to begin factoring in higher interest rates, a rebound in consumer spending could be jeopardized, which would have a negative impact on overall economic growth during the second half of this year, he said.

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