Sat, Nov 03, 2007 - Page 12 News List

ANALYSIS: Analysts dismiss fears of inflationary pressure

By Joyce Huang  /  STAFF REPORTER

Taiwan is facing limited inflationary pressure despite rising prices, especially after the government initiated a contingency measure to prevent fuel-price hikes of more than 15 percent, analysts said yesterday.

"The government measure will be effective in limiting the impact of any surge in crude oil prices so as to stabilize the nation's consumer price index [CPI]," said Standard Chartered Bank chief economist Tony Phoo (符明財).

Phoo remained confident that the nation's full-year inflation rate would average 1.6 percent this year, and that the central bank is likely to raise its key interest rate by a meager 0.125 percent on mild economic growth.

In a report issued last Tuesday, UBS Investment Research also maintained its view that inflation was illusory, despite this week's surge in oil prices.

UBS estimated that the monthly CPI in the fourth quarter would average 1.6 percent, the firm's Hong Kong-based economist Sean Yokota said.

Yokota said in an e-mail interview yesterday that rising oil prices only affected around 5 percent of Taiwan's CPI basket.

Food prices, which have pushed up headline inflation, are likely to come down by the end of the year, and this downward pressure should counter some of the upward pressure from oil prices, he added.

"In addition, we see [economic] growth slowing in 2008, which should also ease inflationary concerns," Yokota said.

"Although food is currently the main driver of inflation, in order for inflation to persist, wages need to rise," UBS said in its report last week.

Since it was unlikely that the unemployment rate would decrease significantly from the current level of 3.9 percent, UBS Investment said the labor market was unlikely to tighten and push wages and the CPI up further.

The CPI growth rate hit a two-year high of 3.08 percent year-on-year in September and is expected to remain above 3 percent amid hikes in oil prices and typhoon-devastated food prices.

Citibank Taiwan forecast that the nation's CPI growth rate would accelerate to 3.2 percent year-on-year last month.

This would be the highest rate since September 2005, Citibank economists Cheng Cheng-mount (鄭貞茂) and Renee Chen (陳瑩若) said in a report issued yesterday.

"Overall, we think October price data will confirm an underlying inflationary trend that will likely keep the central bank vigilant," the report read.

Although the central bank should be alert in containing possible inflationary pressures, Shih Hsin University economics professor Chou Ji (周濟) said yesterday that the nation was facing less inflationary pressure than had been expected.

"The public sentiment that prices are climbing triggered further fears of inflationary pressures, although the full-year average is still low," Chou said, adding that the core CPI excluding food and energy remained stable.

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