Central bank could hike interest rates

The nation's central bank will take consumer prices into account as it decides whether to lift its benchmark interest rates in the quarterly meeting today, the bank's governor Perng Fai-nan (彭淮南) said.

"We care about consumer prices," Perng told the legislative finance committee at a question-and-answer session yesterday.

He said that the bank considered consumer price stability its top priority, and whether to adjust interest rates would not be his call alone, but would be based on the consensus reached by all of the meeting's members.

In the first two months of the year, Taiwan saw an average consumer price index (CPI) of 1.22 percent and a core CPI of 0.78 percent. Inflation will be stable, Perng said, as retail prices are difficult to raise when there is strong market competition, combined with little increase in average wages and steady property rental fees.

The governor's remarks came after the US Federal Reserve announced on Tuesday it would raise its benchmark interest rates for the seventh time since mid-2004.

The bank raised its federal funds rate a quarter-percentage point to 2.75 percent, which caused Hong Kong's fiscal authorities to match the move yesterday.

As the Fed's move has widened the interest rate gap between Taiwan and the US, prompting the market to expect an interest rate hike of between 0.125 percentage points and 0.25 percentage points by the central bank today.

The central bank raised its benchmark interest rates by 0.125 percentage points on Dec. 30 for a second straight quarter, boosting the rediscount rate to 1.75 percent, while pushing the secured accommodations rate and the unsecured loan rate to 2.125 percent and 4.0 percent, respectively.

Perng also vowed to turn the currently "negative" real interest rates -- the value of the prime rate minus the CPI -- back to a "normal level," amid worries about possible inflation this year.

Taiwan is expected to see its CPI grow by 1.67 percent this year, up from 1.62 percent last year.

However, the investment bank Lehman Brothers said in a report released yesterday that it believes that Taiwan's central bank is likely to keep the rates on hold, citing a weakening economy, easing inflation and a strengthening currency.

"Taiwan's GDP growth weakened in the fourth quarter to 3.3 percent year-on-year from 5.5 percent in the second quarter last year," the report read, adding that the export sector is softening and Taiwan's leading economic index has fallen for four months in a row.

Lehman Brothers said that Taiwan's overall monetary conditions have tightened recently via the appreciation of the NT dollar.