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Central bank raises interest rates

The central bank tightened its monetary policy yesterday, raising its key interest rate by 0.125 percentage points to limit the risk of higher inflation from rising raw materials prices.

It was the 13th consecutive rate hike since October 2004. In June, the central bank hiked interest rates by a wider-than-expected 0.25 percent. But it slowed its pace in the wake of the US Federal Reserve cutting its key interest rates by 50 basis points on Wednesday to ease the housing mortgage crisis.

"The bank only fine tuned its monetary policy this time because of the financial turmoil and uncertainties in global markets," bank Governor Perng Fai-nan (彭淮南) told a press briefing yesterday.

The decision will bring the discount rate -- at which local banks borrow short-term funds directly from the central bank -- up to 3.25 percent. The rates on accommodations with collateral and without collateral will rise to 3.625 percent and 5.5 percent respectively.

"The adjustment was mainly because of our concern over consumer price movements. The increase is expected to accelerate in the second half," Perng said.

Rising oil prices, vegetable price hikes caused by typhoon-related floods and low base last year would be major factors driving up the consumer prices later this year, he said.

The Directorate General of Budget, Accounting and Statistics said the nation's core price index -- a major tool to gauge the inflationary risks -- might rise 2.34 percent annually in the second half, much faster than the 0.61 percent growth in the first six months of the year.

Perng said the latest hikes would bring the nation's actual rates closer to neutral, but they have not yet reached the bank's goal.

"That meant the central bank's interest hikes have not come to an end yet," said Cheng Cheng-mount (鄭貞茂), Citigroup Inc's chief economist in Taiwan, in a telephone interview yesterday.

"Inflationary risks are indeed a problem that requires the central bank's greatest attention, compared to the housing mortgage problem, as prices of raw material imported from overseas are much higher than in the US," Cheng said.

Taiwan's own housing mortgage problems will also not be as severe as those of the US, where financial tools backed by property mortgages were traded much more actively, Cheng said.

He had earlier predicted the central bank would hold interest rates steady in a bid to narrow the rate gap with the US, after the Fed's rate cuts on Tuesday.

Perng also hinted there was a slim chance of a local credit crisis.

He said major local lenders such as the Land Bank of Taiwan (土地銀行) had only slightly increased mortgage interest rates by between 0.38 percent and 0.78 percent earlier this month. He also said the central bank has enough capital to tackle any potential credit crisis.
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