Tue, Feb 12, 2008 - Page 12 News List

Central bank may pause interest rate hikes: Moody's

By Lisa Wang  /  STAFF REPORTER

The central bank may pause its monetary tightening policy to cope with possible weakness in economic growth now that long-term inflationary pressures appear to be under control, research house Moody's said in a recent report.

Taiwan's growth momentum is likely to moderate, weighed down by a recessionary outlook for the US economy in the first half of this year by Moody's Economy.com, Moody's said in the report released last Wednesday.

"Given that Taiwan's consumer prices appear to be under control, the central bank may have to give its current monetary policy tightening cycle a pause soon," Moody's said.

The consumer price index (CPI), a major gauge measuring inflation risk, continued to ease for a third consecutive month, coming in at a 3 percent year-on-year rise in January, compared with a 3.3 percent year-on-year increase in December, the report said.

In late December, the central bank hiked its benchmark interest rates for the 14th straight quarter since the summer of 2003 in a bid to curb rising inflationary risks caused by soaring energy and raw material costs.

The rate hikes have pushed the discount rate -- the rate which local banks borrow short-term funds from the central bank -- to a six-year high of 3.75 percent.

GDP is expected to grow 4.53 percent annually, slowing from the projection of 5.46 percent growth for last year, the government has forecast.

But Moody's warned that Taiwan's inflationary risk remains elevated.

Food prices were the key driver of the CPI last month, surging 5.3 percent year-on-year, followed by medical care costs, which jumped 4.7 percent year-on-year.

Growing demand coupled with a decline in food output recently has seen global commodity prices skyrocket, Moody's said.

Given Taiwan's location in a typhoon-prone region, it is particularly vulnerable to price spikes due that affect food supplies, the research firm said.

Surging global oil prices and other energy resource costs would also continue to threaten price stability in Taiwan, the report said.

High energy costs will drive up business costs, which will eventually be felt by consumers, Moody's said.

Transport prices rose 3.8 percent year-on-year in January, the Directorate-General of Budget, Accounting and Statistics said.

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