Mon, Sep 10, 2012 - Page 13 News List

Central bank ‘likely to keep key rates’

BEST BET:Economists agree that although maintaining growth is a struggle, inflationary pressures caused by two typhoons driving up food prices are likely to be short-lived

By Amy Su  /  Staff reporter

The central bank is likely to keep key interest rates unchanged at the quarterly board meeting on Sept. 20, caught between still weak economic sentiment and rising inflationary pressures, economists said yesterday.

That means the central bank would keep its policy rates unchanged for the fifth straight board meeting, with the rediscount rate at 1.875 percent, the collateralized loan rate at 2.25 percent and the unsecured loan rate at 4.125 percent.

“The central bank is facing a contradictory situation under the current economic conditions,” Taiwan Institute of Economic Research (台灣經濟研究院) director Steven Yang (楊家彥) said by telephone.

Taiwan’s exports last month contracted for the sixth consecutive month from a year ago, the Ministry of Finance reported on Friday, as the economy struggles to maintain 2 percent growth this year.

Annual inflation expanded at its fastest pace in four years last month at 3.42 percent, as vegetable and fruit prices climbed after the nation was struck by two typhoons, the Directorate-General of Budget, Accounting and Statistics reported on Wednesday last week.

Yang said the central bank should adopt an easing-oriented monetary policy when economic momentum remains sluggish.

However, logically, the bank has to tighten its monetary policy to restrict rising consumer prices and slow inflationary pressures, he added.

Faced with this dilemma, Yang said the central bank might hold interest rates, because the major factor recently driving up consumer prices was a short-term one, while maintaining a “relative easing” strategy by maintaining its credit-tightening measures on home loans.

The bank would also continue its open-market operations, such as the issuance of negotiable certificates of deposit (NCD), to absorb excess liquidity in the market, Yang said.

On Friday, the central bank sold NT$100 billion (US$3.35 billion) worth of 364-day NCDs at an average interest rate of 0.829 percent through an auction, which was lower than the 0.853 percent recorded in a previous sale and represented a 20-month low amid high liquidity in the local market.

The sale of the instruments since April 2010 was the equivalent of increasing the required reserve ratio by 4.5 percentage points, the bank said.

Liu Meng-chun (劉孟俊), director of the center for economic forecasting at the Chung-Hua Institution for Economic Research (中華經濟研究院), shared Yang’s views.

“The central bank may keep the policy rates unchanged, as any move will have a limited effect under the current conditions,” Liu said by telephone yesterday.

Monetary policy could not play a major role in speeding up the economy as Taiwan’s current interest rates have been at a relatively low level, he said.

On the currency front, Liu said the bank did not have too much space to operate for now, as local exporters call for a moderate depreciation of the New Taiwan dollar against the US dollar. However, such a move may further raise import prices and boost cost-raising inflationary pressures.

Compared with monetary policy, sustaining the economy by diversifying the export market may be a more effective startegy for now, Liu said, adding that trading momentum between Taiwan and certain emerging economies has been showing upsides this year.

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