Fri, Sep 16, 2005 - Page 1 News List

Central bank raises interest rates

FIGHTING INFLATION The bank's 0.125 percent hike has continued a year-long trend of raising rates in an ongoing attempt to keep a tight lid on price increases

By Jackie Lin and Jessie Ho  /  STAFF REPORTER

In a move to stabilize consumer prices and combat looming inflation, the nation's central bank yesterday raised the benchmark interest rate by 0.125 percentage points for the fifth consecutive quarter.

"The central bank's priority is to stabilize consumer prices and then help boost economic development," Perng Fai-nan (彭淮南), governor of the Central Bank of China, told reporters at a press conference following a quarterly policy meeting yesterday afternoon.

The monetary policy-making body announced that the rediscount rate charged to commercial lenders would be hiked to 2.125 percent. It also jacked up both the secured accommodations rate and unsecured loan rate to 2.50 percent and 4.375 percent, respectively.

"Now real interest rates are still on the negative side, but this is not a rational phenomenon. We decided to take a gradual approach to steer monetary policy back to the neutral stance," Perng said.

Real interest rates are equivalent to interest rates minus the rate of inflation, as measured by the rise in the consumer price index (CPI).

For the first eight months of the year, Taiwan's CPI rose 2.13 percent over the same period last year, as frequent typhoons have led to price hikes for vegetables and fruit, and global crude oil price increases have prompted domestic refiners to boost gas prices at the pumps.

Last month alone, inflation soared to a seven-year high of 3.56 percent, 0.76 percent higher than July, according to the Directorate General of Budget, Accounting and Statistics (DGBAS).

Despite the alarming figure, Perng said the core CPI growth -- excluding vegetables, fruit and energy costs -- remained stable at 0.69 percent between January and August, exerting less inflationary pressure.

However, if electricity and oil prices are hiked by the year-end, the CPI is likely to climb again, he added.

Economists said the central bank's interest rate hikes will not influence the nation's economic growth, investment or the property market, as the range is considered small.

"Apparently, the central bank wants to tackle inflationary concerns first, after both persistently high prices for oil and farm produce have driven up consumer prices," said Chen Miao (陳淼), a research fellow at the Taiwan Institute of Economic Research (TIER, 台經院).

Prices of agricultural products may drop soon as the typhoon season is about to end, so it is the oil prices that would continue to weigh on consumer prices, said Wu Chung-shu (吳中書), a researcher at Academia Sinica.

Oil prices have been lingering around US$65 per barrel recently, and went up further yesterday after a report showed that Hurricane Katrina caused a larger-than-expected decline in US inventories.

Crude oil for delivery next month rose US$0.5, or 0.8 percent, to US$65.59 a barrel on the New York Mercantile Exchange yesterday. Oil is up 50 percent from a year ago, after reaching a record US$70.85 in the end of last month.

The central bank yesterday reiterated its policy on currencies, saying it will enter the foreign-exchange market to "maintain order" if seasonal or irregular factors cause excessive volatility.

According to the bank, the nation's trade surplus has significantly dropped this year, with the total surplus standing at US$1.17 billion, down 79.1 percent from a year earlier.

That, coupled with people's increased overseas travel expenditures and insurers' rising investment in foreign markets, has caused the New Taiwan dollar to depreciate slightly against the greenback recently.

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