Sat, Apr 21, 2012 - Page 12 News List

Barclays expects central bank to raise policy rates

OPPOSING VIEW:Unlike Barclays, Credit Suisse expects the bank to hold rates steady throughout the year, as it expects inflation to remain mild

By Amy Su  /  Staff reporter

The central bank is likely to raise policy rates at least twice this year, starting in June, as the government grapples with inflationary pressures in the second half, Barclays Capital said yesterday.

This would make Taiwan the second nation in emerging Asia — after Singapore — to tighten its monetary policy, the brokerage house said.

“Since the last policy meeting in March, there has been a marked shift in the central bank’s policy tilt towards the cost of living,” Barclays said in its latest research note.

The looming rise in consumer prices led by the government’s upward adjustments to fuel prices and electricity tariffs will be the major factor leading the central bank to tighten its monetary policy, Barclays said.

The tariff adjustments would be a significant shock and would push inflation expectations higher in the near term, as businesses — especially those in the services sector — pass on higher costs to consumers, it said.

The brokerage forecast that headline inflation would rise an average of 2.4 percent from June to December —from 1.21 percent last month — and that full-year inflation would reach 2 percent.

The other key to the timing of a policy rate hike is the growth outlook, Barclays said.

Despite the expected rise in consumer prices, Barclays said consumption would be buffered by higher wages, minimizing the energy price hike’s impact on growth.

Moreover, the momentum in industrial production and exports is accelerating, with consumer and business confidence recovering gradually as fears over Europe recede, it said.

These facts made it raise its forecast for full-year growth for GDP to 3.5 percent, from the 3 percent it estimated previously.

Credit Suisse, however, said it expected no near-term monetary policy response from the central bank, because its outlook on inflation remained moderate.

The central bank is likely to keep its policy rates on hold throughout this year, it said in a research report issued on Wednesday.

Credit Suisse forecast that inflation would rise by 2.1 percent this year and 2.2 percent next year, with the energy price increases having a limited impact on inflation at 0.2 percentage points from the power tariff rise and 0.33 percentage points from the fuel price increase.

However, the central bank would have a tougher role in managing inflationary pressures going forward, it said.

As the cushion on inflation is reduced, Credit Suisse expects the central bank to act more strongly in the future through interest rates and foreign exchange policy in the event of another surge in global crude oil prices.

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