Wed, May 21, 2008 - Page 11 News List

ANALYSIS: Economists split on how to curb inflationary pressure

GOING UP?The vice premier admitted last week that it would be difficult to curb the CPI to less than 2 percent this year, which could hint at more interest rate hikes

By Joyce Huang  /  STAFF REPORTER

Economists expressed mixed views on whether the new government should tackle the nation's increasing inflationary pressures by allowing both rate policies — interest rates and the New Taiwan dollar's exchange rates — to go up.

“The interest rate should be held unchanged [at the central bank’s quarterly meeting next month],” said Chen Miao (陳淼), an associate research fellow at the Taiwan Institute of Economic Research (TIER, 台灣經濟研究院). “Stimulus should be given [by the new government] to encourage economic growth, instead of contraction measures to suppress it.”

In theory, hikes of both rates will bring inflation under control, Chen said.

But in reality, any further interest rate raise will add pressures to people’s willingness to spend, which will drag down a much-anticipated pickup of domestic consumption in the second half of this year to bolster the local economy, he said.

He also said rate policies, which work as the financial instruments to address the economy, will only take effect in six months’ time. By then, the consumer price index (CPI) may be on a downward slide.


As an unfreezing of domestic fuel prices and utilities rates is inevitable, Vice Premier Paul Chiu (邱正雄) admitted last week that it would be difficult to curb the CPI to less than 2 percent this year.

This was interpreted as a hint that the central bank would continue to raise interest rates, while allowing the NT dollar to appreciate, to contain worsening inflation.

During its last meeting on March 27, the central bank raised its benchmark interest rates for the 15th straight quarter by another 0.125 percentage points to a six-year high of 3.5 percent in a bid to curb inflationary risks, caused by soaring energy and raw material costs.

Many speculated that the central bank’s rate raises might end.

Last Wednesday, Chiu told the Chinese-language Economic Daily News that the new administration plans to hike domestic fuel prices while raising electricity rates in stages.

By doing so, the impact on domestic prices would be mitigated “within an acceptable range,” he said.

Chiu said that supporting measures will be taken to cushion the impact of fuel and utilities hikes by rolling out subsidies for low-income and disadvantaged groups.

Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院), supports the new government’s planned rate hikes.

“These are a couple of many measures for the new government to seriously consider,” Liang said.

He said allowing the NT dollar to strengthen will make imported goods cheaper and end up containing the nation’s inflationary risks, which are mostly triggered by fuel prices and raw materials.

An interest rate raise will also help attract foreign capital to vitalize the domestic capital market, he said.

Liang said that he “expects the central bank to raise its discount rate by another 0.125 percentage points or 0.25 percentage points in its June meeting.”

But a weaker NT dollar is sure to hurt exporters and another interest rate hike may stem the nation’s investment sentiment which is already slow.

“It’s always a trade-off between inflation containment and economic stimulus,” Liang said.


Moreover, a local currency dealer, who requested anonymity, cast doubts on whether the central bank would allow the NT dollar to strengthen over the NT$30 level against its US counterpart.

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