With the central bank to convene its quarterly board meeting on Thursday, most financial institutions believe the regulatory institution will raise its benchmark interest rate, with most predicting a hike of 0.125 percentage points, a poll released yesterday said.
Almost all banking institutions, private as well as state-run, said the central bank would likely raise its discount rate to help defuse inflationary pressure that has shown no signs of letting up since the transfer of power last month, the survey conducted by the Chinese-language Commercial Times found.
The newspaper surveyed banking officials between last Monday and Friday.
More than 60 percent of the respondents said they believed the central bank would lift its interest rates for the 16th straight quarter by 0.125 percentage points. That would put the discount rate at 3.625 percent.
BOLDER HIKE UNLIKELY
The poll found the respondents said a bolder hike was unlikely because the board, which will be comprised of economic, financial and agricultural officials, will likely be cautious.
They said the Chinese Nationalist Party (KMT) administration had made expanding domestic demand its top priority and did not want monetary measures that could produce the opposite effect.
A local commercial bank official said a hike greater than 0.125 percentage points would hurt economic growth because it would encourage the purchase of negotiable certificate deposits (NCD), subjecting the central bank to heavy interest pressure.
The Cabinet is seeking the legislature’s approval for a special budget of NT$130.1 billion (US$4.28 billion) as part of its efforts to stabilize commodity prices and increase economic growth 0.45 percentage points this year.
About 33 percent of the respondents said the central bank would raise the interest rate by 0.25 percentage points and said a smaller adjustment would do little to curb inflation.
The central bank has raised its discount rate since October 2004 but the move has proved to be futile in containing inflation pressures.
Citi Investment Research economists Cheng Cheng-mount (鄭貞茂) and Tina Liao forecast a rate hike of 25 basis points this month and two hikes of 12.5 basis points in September and December respectively, they said last week.
“As the government revised its 2008 GDP and CPI [consumer price index] forecasts in May to 4.78 percent and 3.3 percent respectively, prospects for a better economic outlook and mounting inflationary pressure may lead to the central bank accelerating monetary tightening,” they wrote in a client note on Friday.
‘NASCENT RECOVERY’
Tony Phoo (符銘財), the chief economist of Standard Chartered Bank (Taiwan) Ltd, disagreed.
Phoo said the central bank was unlikely to tighten its monetary policy significantly this time and would probably only raise rates by 0.125 percentage points for fear that “it could derail the still nascent recovery in domestic demand,” he wrote in a report on Thursday.
Phoo said the central bank would opt for a mild rate hike as usual to avoid a negative impact on recovering domestic private consumption, which is viewed as a key growth impetus for the nation’s economy in the face of slowing external demand as downside risks in the global economy and financial markets persist.
“Increases among consumer loans have been hovering at below 2 percent year-on-year in recent months, a far cry from the double-digit increase registered between 2003 and 2005 and in spite of the recovery following the cash and credit card crisis in 2006,” Phoo wrote.
There are also concerns that hikes in fuel and electricity prices will cut into private consumption and dampen consumer spending, he wrote.
Moreover, the central bank’s latest monetary aggregate M2 supply figures hinted at another challenge for the nation’s economy, the Standard Chartered economist said in its report.
In the first four months of the year, the M2 money supply grew 1.59 percent, compared with 4.3 percent year-on-year for the whole of last year, he said.
The central bank will release M2 growth data for last month on Wednesday, which the monetary policymakers will factor into their diagnosis of economic growth, the strength of the stock and real estate markets, banks’ attitudes towards lending and the investment atmosphere before deciding on rate hikes.
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