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.
curb
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.
doubts
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.
“A stronger NT dollar will hurt exporters’ profits and make it harder to secure foreign orders,” he said. “We believe that Central Bank Governor Perng Fai-nan (彭淮南) will insist on the currency’s stability.”
Liang and Chen, agreed that the nation’s inflation may not be as bad as expected.
Chen said that the government has earmarked a 2 percent CPI as a gauge of whether the nation’s inflationary pressures have posed a warning threat.
But history shows that the CPI had never dropped below 2 percent when the economy was vibrant.
Even if the CPI is expected to exceed the 3.5 percent level after next month and average above 3 percent over the whole year, the nation’s inflationary condition will still be relatively good, compared to neighbors such as China, Vietnam and Thailand, Liang said.
He, therefore, urged the new government to remain flexible for fear of anticipation among consumers that prices will continue to go up, which will harm the economy.
The Directorate-General of Budget, Accounting and Statistics said on Monday that, if a 10 percent to 20 percent price hike is imposed from next month, the nation’s CPI may climb by between 0.2 percentage points and 0.39 percentage points.
climb
SinoPac Holdings (永豐金控) has estimated that should domestic fuel prices be raised by NT$3 per liter, or at a scale of 11 percent, the CPI would climb 0.33 percentage points.
The CPI will further go up 0.66 percentage points once utilities rates are hiked by 30 percent. Together, both fuel-price and utilities-rate hikes are expected to lift the CPI by 1 percentage point, as predicted the by Chung-Hua Institution for Economic Research last month.
If so, the CPI may hit 5 percent this year, compared with the 2.7 percent interest rate per annum for one-year time deposits.
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