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Central bank raises key interest rates

The central bank raised its benchmark interest rates for the 15th straight quarter yesterday in a bid to curb inflationary risks caused by soaring energy and raw material costs.

The bank raised its discount rate -- the rate at which local banks borrow short-term funds from the central bank -- by another 0.125 percentage points to a six-year high of 3.5 percent, effective today.

The rates on accommodations -- with collateral and without -- were raised to 3.875 percent and 5.75 percent respectively.

"The bank raised the key interest rates to fight rising inflationary pressure as the nation's consumer price index [CPI] may reach 3.2 percent in the first half of this year and average at more than the government's previously projected 2 percent target in the whole year," central bank Governor Perng Fai-nan (彭淮南) told a press briefing.

Interest rates were now "closer to" the bank's targeted "neutral rate," Perng said, refusing to say whether the bank will raise rates again when its board meets in June.

Deutsche Bank, however, said yesterday that this could be the end of the central bank's tightening cycle in light of the downside risks to the nation's economic growth outlook.

"[We] expect the central bank to deliver rate cuts from the third quarter onward," Deutsche Bank said in an e-mail to the Taipei Times.

To prevent private investments from being hurt by the hikes, the central bank announced a series of supporting measures, including reducing its foreign exchange deposit reserve rate from the current 5 percent to 0.125 percent effectively next Tuesday.

"After the foreign exchange deposit reserve rate cut, we expect that domestic banks will be able to raise its interest rate for US-denominated deposits by at least 10 basis points, which will help narrow the gap of interest rates between Taiwan and the US," Perng said, insisting the rate hikes will have less-than-expected impact on local economic growth.

But Chen Miao (陳淼), an associate research fellow with the Taiwan Institute of Economic Research (台經院), said the central bank's interest rate policies will take three to six months to have an effect on inflation, by which time inflationary pressures may have already eased.

"But raising the rates [to another historical high] now will suppress economic momentum," Chen said.

He said the bank's supporting measures would be "ineffective in stopping [foreign investors] carry trade as the New Taiwan dollar will be more attractive to them."

To help cover domestic banks' interest payment costs, the central bank also decided to adjust the interest rates at which local banks are paid for their deposits in the central bank. The rates were raised from 1.5 percent to 2.75 percent for time deposits and by 0.25 percent for saving deposits.

"We'd like to encourage banks to adjust their deposit structure by accepting more time deposits, although this will add to the central bank's cost," Perng said.

He reiterated that approximately NT$200 billion (US$6.63 billion) in foreign capital was now parked in local accounts in an attempt to speculate on a stronger NT dollar, which has risen 6.98 percent since the beginning of this year.

Foreign capital inflows are restricted in equities investments only, Perng said, adding that idle foreign capital must follow financial regulations or face a fine of between NT$30,000 and NT$600,000.
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