Fri, Sep 30, 2011 - Page 12 News List

Central bank to maintain policy rates

WAIT AND SEE:The central bank governor declined to say whether the cycle of interest rate increases had officially ended or if the current move was just a pause

By Amy Su  /  Staff Reporter

The central bank yesterday kept its benchmark interest rates unchanged as expected in view of mild inflationary pressures and global economic uncertainty.

It is the first time that the bank has maintained its policy rates in more than a year, having raised them for the past five straight quarters.

The bank’s discount rate remained at 1.875 percent, with the collateralized loan rate and the unsecured loan rate standing unchanged at 2.25 percent and 4.125 percent, the central bank said.

“We decided to hold the rates as the global economy faces a slowdown and the growth in consumer prices may remain low and stable for the next year,” central bank Governor Perng Fai-nan (彭淮南) told a media briefing after yesterday’s quarterly board meeting.

Perng said the downside economic risks faced by the nation’s main trading partners would have a -negative impact on Taiwan’s exports, but he did not expect uncertainties in the US and Europe to hurt Taiwan’s economy as much as the financial crisis of 2008.

In addition, the recent falls in the price of gold and crude oil also provided evidence that global inflationary pressures had reached their peak in the third quarter, which was the other reason for the central bank deciding to hold its rates, Perng said.

“The slowing global economy usually leads to lower demand for commodities, further dragging down these products’ prices,” he said. “This would ease imported inflationary pressure.”

The Directorate-General of Budget, Accounting and Statistics’ latest forecast for inflation this year stands at 1.59 percent. It also forecast a mild 1.21 percent growth for inflation next year.

However, Perng refused to confirm or deny if the decision meant the cycle of interest rate increases had officially ended or whether this was just a temporary pause.

Tony Phoo (符銘財), a Taipei-based economist at Standard -Chartered Bank, said the central bank may keep rates on hold into the first half of next year.

“The bank is unlikely to move to a tightening mode unless global economic conditions improve significantly going forward, or it is increasingly comfortable that domestic market is able to withstand external headwinds and risks,” Phoo said in a note yesterday.

Cheng Cheng-mount (鄭貞茂), chief economist at Citigroup in Taipei, also expects the central bank to postpone any rate increases until next year. He said there was no need to cut rates with global economic growth likely to slow to trend growth, rather than subpar growth, in the future.

However, keeping interest rates low would adversely affect some financial institutions’ investments, notably life insurers, said Raymond Yeung (楊宇霆), a Hong Kong-based economist at ANZ Research.

“If inflation is to stay low for a longer while and liquidity remains ample, the yield of Taiwan’s fixed income assets is expected to bottom for an extended period,” Yeung said in a research note.

Prior to the global financial crisis, Taiwan’s policy rate was 3.625 percent in the middle of 2008, the central bank’s data showed.

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