The central bank is likely to raise interest rates in late December, while the local currency may weaken slightly against its US counterpart as Taiwan’s economy lags behind its peers this year, the Australia and New Zealand Banking Group (ANZ) said yesterday.
ANZ expects Taiwan’s export-focused economy to grow 2.3 percent this year, weaker than an estimated 2.6 percent for South Korea, 2.5 percent for Hong Kong and 2.4 percent for Singapore, because of soft external demand, ANZ chief economist Warren Hogan said in a report.
“We expect a pick-up in world growth,” driven by growth in advanced economies and stable growth in emerging Asia, Hogan told a media briefing in Taipei.
US housing is on track for a solid recovery and the comeback, if mild and slow, will have positive knock-on effects for small businesses and employment, thereby lifting consumer spending, he said.
However, the economist voiced concern that the US Federal Reserve’s planned tapering of quantitative easing (QE) could be a risk for Asia, as corporate leverage has increased substantially during the QE period and a withdrawal may cause a financial disruption.
Meanwhile, European economic activity has contracted for six quarters and there is no sign of the trend ending any time soon, Hogan said.
China, which accounts for 40 percent of Taiwanese exports, may concentrate on improving the quality of its economy and stop pursuing high growth, ANZ chief economist on Greater China Liu Li-gang (劉利剛) said.
While most economists expect the Chinese currency to strengthen against the greenback, Liu said the yuan may depreciate if the government allows Chinese citizens to buy foreign assets in a continued bid to internationalize the yuan.
The New Taiwan dollar, which is highly related to yuan, is predicted to trade an average of NT$30 versus the US dollar this month, NT$30.2 next month and NT$30.3 in December, the ANZ report showed.
The softening trend may extend into next year, with the local currency trading at NT$30.4 in March next year and at NT$30.5 in the following six months, the report said.
Against this backdrop, the central bank may temporarily keep the benchmark interest rates unchanged, but raise them by 12.5 basis points at the end of the year, as the economic recovery strengthens, ANZ senior Greater China economist Raymond Yeung (楊宇霆) said.
“We are cautiously optimistic about Taiwan’s economic outlook, which will start to show improvement in the second half,” as the US and Japan continue to heal and China holds steady, he said.
Consequently, ANZ expects Taiwan’s economy to grow 3.8 percent next year. That, coupled with well-contained inflation, would give the central bank room to hike interest rates, Yeung said.