The nation's central bank announced yesterday that it is lifting its benchmark interest rates for the second straight quarter by 0.125 percentage points, in a bid to lower the risk of inflation risk and overly low real interest rates which are disadvantageous to long-term financial stability.
The decision to hike rates takes effect today, raising the bank's rediscount rate to 1.75 percent while boosting the secured accommodations rate and the unsecured loan rate to 2.125 percent and 4.0 percent, respectively.
"We are worried that the consumer price index (CPI) could overshoot next year, considering the likelihood of utilities prices rising in the future," central bank governor Perng Fai-nan (彭淮南) said, after the bank's quarterly meeting yesterday.
"The rate hikes aim to return real interest rates to their normal level," Perng said.
The central bank on Sept. 30 raised its benchmark rate by a quarter-percentage point, the first increase in four years.
Perng yesterday, however, defined the bank's monetary policy as "neutral."
While the bank cited concern over inflation as the reason for its rate hike decision, Perng declined to give the bank's own CPI forecast for next year.
Citing figures provided by the Directorate General of Budget, Accounting and Statistics (DGBAS), Perng said that the CPI could soar beyond 2 percent next year, after taking account of likely rises in water and electricity bills as well as transportation fares.
DGBAS last month raised its inflation forecast for next year to 1.88 percent.
Perng said the central bank will keep a close watch on the results of rate hikes by commercial banks, as rising borrowing costs may help cool domestic demand and thus ease inflationary pressure.
The bank's decision to hike rates is in line with the prediction of some foreign market watchers.
JP Morgan Chase Bank said earlier this week in a report that it expected the central bank to raise interest rates by 0.125 percentage points by year-end and by 0.625 percentage points in total by the end of next year.
Some people are concerned that rising interest rates may cause the NT dollar to appreciate, making Taiwanese goods more expensive abroad.
In response, Perng said the central bank sensed an inflow of hot money in recent days to push up the NT dollar exchange rate as well as the TAIEX.
He said the bank intended to follow the mechanisms of the free market in principle but would would be willing to intervene over changes brought about by accidental, seasonal or psychological factors.
The NT dollar yesterday closed down NT$0.002 at NT$31.978 against the US dollar in Taipei.
The currency has risen 6.25 percent from a year ago, according to the central bank.