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Central bank to continue fiscal tightening: analysts

While the nation's monetary policymaker has not aggressively raised the benchmark interest rate as some economists had predicted, it will continue to tighten fiscal policy for the remainder of the year in order to fight inflationary pressures, analysts said yesterday.

The central bank announced yesterday it was raising the discount rate by 12.5 basis points to 3.625 percent, its 16th consecutive quarterly increase since October 2004.

In addition, the central bank announced it was lifting the reserve requirements for passbook deposits by 1.25 percentage points and the reserve requirements for time deposits by 0.75 percentage points, in a bid to curb excessive liquidity in the banking system, the central bank said in a statement.

The central bank also adjusted downward its target zone for aggregate M2 money supply growth to a range between 2 percent and 6 percent for the remainder of the year, from its previous range of 3 percent to 7 percent to reflect diversified portfolio allocations and a decreasing demand for cash because of expectations of rising inflation.

The central bank “seems to be trying to convince the public that it is in top gear in the fight against inflation,” Citi Investment Research economist Cheng Cheng-mount (鄭貞茂) wrote in a research note yesterday.

Cheng had predicted a rate hike of 0.25 percent by the central bank before yesterday’s board meeting.

Central bank governor Perng Fai-nan (彭淮南) told a press briefing following the board meeting that the bank’s rates had reached a “neutral” level. It “hinted that future monetary policy will probably focus more on controlling the ‘quantity’ of money instead of focusing on the ‘price,’” Cheng wrote.

Like elsewhere in Asia, the latest rate increases by Taiwan’s central bank reflected a cross-border concern among regional monetary policymakers about upside inflationary risks on the back of rising oil and food prices.

The government’s latest consumer price index data showed inflation grew 3.71 percent year-on-year last month, following a rise of 3.85 percent in the previous month.

But inflation is likely to rebound significantly following the recent announcement of more fuel and electricity price increases and Deutsche Bank’s economics research unit yesterday predicted the central bank would “remain vigilant and maintain the tightening bias” until end of the year, it said in an e-mailed statement.

Cheng forecast that the central bank would implement two more rate increases of 0.125 percentage points following the board meetings in September and December.

Other tightening measures are also likely to materialize. Cheng said any additional measures could negatively affect domestic sentiment, especially on the stock market, in light of the increased global economic uncertainty. But the impact on the foreign exchange market would likely be more muted, he said.
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