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Central bank raises interest rates in wake of inflation

The nation's central bank decided yesterday to lift its benchmark interest rates for the third straight quarter by 0.125 percentage points out of concern over inflation and worries about the low level of real interest rates (nominal rates adjusted for inflation).

The decision to hike rates takes effect today, raising the bank's rediscount rate to 1.875 percent while boosting the secured accommodations rate and the unsecured loan rate to 2.25 percent and 4.125 percent, respectively.

The increase is, however, only a small-scale adjustment that will have a limited effect in increasing capital costs in the business sector, central bank governor Perng Fai-nan (彭淮南) said after the bank's quarterly meeting.

"We are taking precautionary measures in the face of uncertain factors likely to happen in the second half of this year [that could strengthen inflationary pressure]," Perng said.

For example, the proposed doubling of the tax on cigarettes -- from NT$5 to NT$10 per pack -- could add another 0.135 percentage points to the Consumer Price Index (CPI), Perng said.

The CPI this year could rise beyond the 1.67 level percent forecast by the Directorate General of Budget, Accounting and Statistics last month, because of a rise in the prices of of raw materials like crude oil and possible increases in fees for domestic utilities, according to the central bank.

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