Cathay Financial Holding Co (國泰金控) yesterday raised its GDP growth forecast for the nation this year, but warned of external risks to growth.
The company revised up its growth forecast from 2 percent to 2.3 percent, as an improving economic growth momentum translates into stronger wage growth and consumption as well as higher interest rates ahead.
Despite the rosier outlook on global growth, inflation in the US, Europe and China is expected to rise faster at a time when central banks across the globe prepare to pull back quantitative easing efforts, researchers said, citing a survey by Bloomberg.
National Central University economics professor Hsu Chih-chiang (徐之強), who led the research team, said that Taiwan is also facing rising inflation, which adds to the conditions that would prompt the central bank to begin its interest rate hike cycle in the second half of this year.
Core CPI, which excludes vegetables, fruit and energy, grew 1.61 percent last month from a year earlier, with the figure approaching the government’s target range of 2 percent, Hsu said.
Rising commodity prices have begun to affect consumer goods prices and rapidly eroded the real interest rate returns of pensioners, he said.
As the central bank does not have a lot of room left for further interest rate cuts, it might turn hawkish as its options are exhausted, he said.
A stronger New Taiwan dollar has helped combat imported inflation, Hsu said.
However, the local currency’s sharp rise from NT$32 against the US dollar a year ago to about NT$29 has been straining exports, he said.
The central bank is expected to raise interest rates gradually and in mild increments to prevent economic shocks, he said, adding that the US economy has recently seen five interest rate hikes without incident.
Taiwan’s consumer confidence has been affected by persistently low interest rates — one of the lowest in the region excluding Japan — as people are discouraged by the lack of interest income, Cathay Financial Holding Co (國泰金控) chief investment officer Sophia Cheng (程淑芬) said.
Low interest rates also make it more difficult for banks to manage risks, as they are compelled to adopt conservative lending strategies, which often cuts out start-up companies, Cheng said.
Under persistently low interest rates, the role of banks in managing credit risk is diminished as lenders are often forced to turn away capable borrowers, she added.
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