The central bank yesterday unexpectedly raised its benchmark policy rates by 0.125 percentage points amid a robust economic recovery, growing bank lending and rising consumer prices.
The move — the central bank’s first interest rate hike since February last year — will see the discount rate increase to 1.375 percent, the rate on collateralized loans to 1.75 percent and the rate on unsecured loans to 3.625 percent, the central bank said. Prior to February last year, the central bank had cut the rates by 237.5 basis points starting in September 2008.
“We hope to guide market interest rates to gradually return to normal levels,” central bank Governor Perng Fai-nan (彭淮南) told a media briefing following the quarterly board meeting, adding that real interest rates were still in the negative territory.
The bank said the economy expanded 13.27 percent in the first quarter on substantial growth in exports and private investment on growing demand from major emerging markets in Asia, and that unemployment has gradually improved.
Perng said the central bank didn’t raise interest rates to rein in soaring housing prices, saying the decision was made based on macro-economic concerns and that the bank has separately adopted “macro prudential measures” to curb property speculation.
“The hikes were very moderate as the rates were only raised 12.5 basis points. It would only affect a few high-risk investors,” Perng said. “Raising interest rates and controlling property prices are two different things. Don’t confuse them.”
The governor said the bank had aggressively adopted moral suasion since October, calling on banks to enhance risk control in lending loans to real estate investors, although some financial institutions still failed to do so.
However, Cheng Cheng-mount (鄭貞茂), Citigroup Taiwan Inc’s chief economist said by telephone that “the move was aimed at curbing the overheating property market,” adding it would be worth observing whether soaring real estate prices come under control. Despite interest rate hikes, Perng said the central bank “would continue to issue long-term certificates of deposit [CD] to withdraw excess liquidity in the banking system.”
Since April, it has issued 364-day CDs for a total value of NT$300 billion (US$9.3 billion).
Central bank statistics showed that M2 annual growth was subdued for an eighth consecutive month, with the broader monetary gauge rising 3.54 percent year-on-year last month, still within the bank’s target range of between 2.5 percent and 6.5 percent.
M2 money supply includes M1B, time deposits, time deposits, foreign currency deposits and mutual funds. The annual growth of M1B, which includes currency held by the public and deposits, also dropped for a fifth straight month to 14.67 percent, lower than 17.92 percent in April because of a net outflow of foreign capital and a higher base effect.
Perng said the interest rate hikes were not big enough to induce large inflows of “hot money” to the country, adding that the bank only “does what it has to do” to maintain price stability.
Daigee Shaw (蕭代基), president of Chung-hua Institution for Economic Research, touted the central bank’s move as he said that interest rates had been kept an extremely low level for a long time.
“I agree with the central bank’s decision because housing prices are clearly too high and consumer prices are indeed rising,” Shaw said by telephone, adding that the economy has shown signs of solid recovery and unemployment is decreasing.
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