Mon, Dec 21, 2009 - Page 12 News List

Interest rate unlikely to change

STABILITY The nation’s record-low inflation will likely be one of the main factors behind the decision to keep the interest rate unchanged this week, analysts say

By Joyce Huang  /  STAFF REPORTER

Central bank Governor Perng Fai-nan (彭淮南) and his colleagues could pledge to hold the key benchmark interest rate unchanged at 1.25 percent when the board meets on Thursday on the nation’s mild economic rebound, analysts said.

“It’s highly unlikely that the central bank will go against the tide since the local economy has just shown signs of stability,” said Wang Lee-rong (王儷容), director of the Chung-Hua Institution for Economic Research’s (CIER, 中華經濟研究院) center for economic research.

Although at a 13-month high, the nation’s exports, which averaged between US$20 billion and US$25 billion monthly, only exceeded the US$20 billion level last month, which was last seen in October last year.

The nation’s record-low inflation, which late last month the Directorate-General of Budget, Accounting and Statistics (DGBAS) forecast would contract by 0.63 percent this year and gain 0.92 percent next year, will provide support behind the bank’s decision to hold the rate unchanged this week, said Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院).

“Only if we saw an asset bubble would the central bank consider reversing its course and increase rates,” Liang said.

There is little room, however, for the nation’s inflation to jump substantially given the record-high unemployment, at 5.96 percent in October.

This will give no incentive to stimulate salary increases or consumer price hikes, said Rick Lo (羅瑋), a senior vice president at Fubon Financial Holding Co’s (富邦金控) macroeconomic research department.

The central bank will also take the US Federal Reserve’s move on Wednesday to keep the interest rate low for “an extended period” as a reference.

“The central bank in Taiwan pretty much follows the US Fed’s move,” another economist said on condition of anonymity.

Most analysts said the central bank could consider rate hikes in the second half of next year when the economy sees healthy and solid growth of between 4 percent and 4.66 percent.

The DGBAS’ recent forecasts showed that the local economy could gain from this year’s 2.53 contraction to GDP growth of 4.39 percent next year.

Citibank Taiwan Ltd (花旗台灣) chief economist Cheng Cheng-mount (鄭貞茂) said he expected the central bank to raise rates in September — one month ahead the US Fed’s planned conclusion of an unprecedented program to revive credit in October next year — as the local economy and its Asian counterparts have emerged from recession faster and in better shape than the US economy.

Wang, however, still expects the nation’s central bank to follow suit only if and shortly after the US Fed reverses its course sometime next year.

Liang said the central bank could allow the local currency’s exchange rate to gain to a certain degree against a weakening US greenback.

The central bank will take into consideration the New Taiwan dollar’s real effective exchange rate index against the South Korean won, Liang said. The index for the NT dollar has exceeded that of the won since June to level at 86.39 points against the won index’s 79.47 in October, using 2005 as a 100-point benchmark, Polaris said.

“This means that there is still room for the central bank to allow the NT dollar to appreciate,” he said.

Polaris said the NT dollar could gain from this year’s average of NT$33 against the US dollar to average NT$31.60 next year, while CIER forecast the local currency will gain from this year’s average of NT$33 to NT$31.66 next year.

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