Mon, Sep 15, 2008 page12

• Analysts expect minimal hike in rates

  WHAT TO DO The president of Polaris Research Institute said the central bank should lower rates to help shore up exports, the mainstay of the nation’s economic growth

  • By Crystal Hsu / STAFF REPORTER
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  With economic prospects still gloomy and inflation starting to decelerate, the central bank is likely to raise interest rates slightly or leave them untouched at its quarterly board meeting later this month to spur economic growth, analysts said on Friday.

  The top monetary regulator has hiked discount and other interest rates for 16 consecutive quarters since October 2004 in a measured attempt to stabilize commodity prices without hurting the economy.

  Though consumer prices remain high, observers said they would not be surprised if the central bank ended its marathon tight monetary policy in a bid to invigorate the financial market.

  Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院), said the central bank was likely to keep interest rates unchanged at the meeting slated for Sept. 25, after inflation eased last month.

  The Consumer Price Index growth rate slowed to 4.78 percent year-on-year last month, compared with 5.92 percent a month earlier, the Directorate-General of Budget, Accounting and Statistics (DGBAS) data showed.

  RECESSION VS INFLATION

  “Many countries in the world have shown greater concern about recession than inflation in the wake of falling oil and raw material prices,” Liang said by telephone. “The central bank will follow the global trend and put a stop to hikes in interest rates.”

  Last Thursday, the Reserve Bank of New Zealand cut interest rates by 50 basis points and markets expect a rate cut by Australia later this month, a Moody’s report released on Friday said.

  Liang said it was in Taiwan’s best interest for the central bank to lower rates, as this would help devalue the local currency and shore up exports, the mainstay of the nation’s GDP growth.

  At its last meeting in June, the central bank raised the discount rate by 12.5 basis points and ordered lenders to put aside more saving reserves. Central bank Governor Perng Fai-nan (彭淮南) said at the time the prime duty of the bank was to fight inflation.

  But Liang said consumer prices would pose less of a threat after the summer. The DGBAS expects the CPI to slip to 2.5 percent in the fourth quarter, while the GDP is estimated at 3.75 percent, lower than the forecast average of 4.3 percent for this year.

  Chief Citigroup Inc Taiwan economist Cheng Cheng-mount (鄭貞茂), who predicted earlier that the central bank would hike interest rates by 12.5 basis points this month, said he would not be surprised if the monetary regulator opted to stay neutral.

  PEAK PRICES

  Cheng said consumer prices appeared to have peaked in July and were coming down slowly, taking some heat off the central bank to tighten money supply.

  “If it decides to raise interests, it will be the last hikes,” Cheng said in a telephone interview.

  In that case, the adjustment would not exceed 12.5 basis points, Cheng said.

  That would bring the discount rate, at which local banks borrow 10-day loans from the central bank, from 3.625 percent to 3.75 percent.

  Such a small increase would have little impact on the capital markets, Cheng said, adding that he believed the central bank would not take additional measures.

  In addition to raising the interest rates, the central bank in June also required lenders to lift the reserves on passbook savings by 1.25 percentage points and time deposits by 0.75 percentage points to help absorb glut liquidity.

  A currency dealer at Union Bank of Taiwan (聯邦銀行) who requested anonymity also said the central bank would likely loosen monetary control to avoid undermining the government’s efforts to expand domestic demand.

  To that end, the dealer speculated the central bank would not cut interest rates, but would make only a slight adjustment or none at all in the hope that idle funds would flow to the local bourse, which has seen sluggish trading for two months.

  “The sustained drop in real interest rates renders a rate cut an unpalatable option,” the dealer said by telephone. “The governor has made it clear that he dislikes negative interest rates.”

  Market rates for time deposits are hovering around 2.7 percent, while inflation is projected to reach 3.74 percent this year, which indicates a 1 percent negative real interest rate and signals the erosion of purchasing power.

  To bridge the gap, the central bank is most likely to lift the rate by 0.125 percentage points and, in doing so, show it is cooperating with government efforts to bolster the economy, the dealer said.

  “No government agency can afford moves that are seen as against the [economic] campaign,” the dealer said.
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