Mon, Aug 25, 2008 page12

• Outlook could prompt rate hike

  HITTING THE PEAK Recent declines in oil and other commodity prices are likely to ease the inflationary headaches that have been plaguing Asian policymakers

  • By Kevin Chen / STAFF REPORTER
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  The government’s updated economic growth and inflation forecasts released last week may prompt a mild interest rate hike next month by the central bank, and that will possibly pose an end to the policymaker’s four-year-long monetary tightening on concern the nation’s economic slowdown will deepen, economists said.

  “Prospects for a slowing economy and a less-concerned inflationary pressure may lead to the central bank decelerating monetary tightening,” Tony Phoo (符銘財), the chief economist of Standard Chartered Bank (Taiwan) Ltd, said by telephone yesterday.

  The Directorate General of Budget, Accounting and Statistics on Friday lowered its GDP growth prediction for Taiwan to 4.3 percent for the year from 4.78 percent estimated in May.

  It also revised upward its forecast for the consumer price index (CPI) to 3.74 percent for the year from previous forecast of 3.29 percent.

  DROP

  As global crude oil prices have recently come down sharply from a record of US$147.27 a barrel on July 11, prices of other commodities have also dropped from their all-time highs, Phoo said Taiwan’s CPI would probably peak last month or this month.

  “With growth momentum in domestic demand remaining weak, we maintain our view that the central bank will most likely hike again next month by another 0.125 percentage points, and that should be its last increase this year,” he said.

  Cheng Cheng-mount (鄭貞茂), chief economist at Citigroup Inc in Taiwan, supports the view that the bank will likely raise the rate for the last time next month.

  “The slowdown will likely be shallow in terms of speed but will likely linger until 2009 ... The chances of a pause in hiking the rate are increasing,” Cheng wrote in a client note on Friday following the release of the updated data.

  Citibank forecasts the central bank will also raise its benchmark rate by 0.125 percentage points during its quarterly board meeting next month.

  In a bid to fight inflation, monetary authorities on June 27 raised its benchmark discount rate to a seven-year high of 3.625 percent, marking its 16th consecutive quarterly increase since October 2004.

  Taiwan aside, other Asian central banks are likely to shift their focus to reignite their economies from fighting inflation, Citigroup’s Hong Kong-based economist Yiping Huang (黃益平) wrote in a report last week.

  The report said recent declines in prices of crude oil and other commodities due to market worries of global economic slowdown are likely to ease Asian monetary policymakers’ inflationary headache earlier than previously expected.

  TRADE

  But deteriorating international trade may adversely affect growth trends in Asian economies in the coming year and lead to less policy tightening, the US investment bank said in Friday’s report.

  “Peaking of Asia’s inflation will probably be at least one month earlier,” Huang wrote in the report.

  Citigroup forecast last month that regional inflation would peak in the second half of the year. At the time, it predicted Asian CPI to grow at an average of 7.6 percent this year and regional GDP growth to average 7.5 percent for the year.

  “Now it looks like inflation will most likely peak in July or August, especially in [South] Korea, Taiwan, India, Indonesia, Malaysia and Thailand,” Huang said.

  Under these circumstances, Asian CPI is expected to average 7.3 percent this year and GDP growth may also average 7.3 percent for the year, the report said.

  Both Standard Chartered and Citigroup are not alone in anticipating the faster-than-expected peak of global inflation. Earlier this month, Lehman Brothers predicted inflation would peak by the fourth quarter in most Asian countries before falling to well within the central banks’ comfort zones next year.

  Lehman Brothers economist Rob Subbaraman wrote in a report dated Aug. 15 that Asian central banks are expected to shift their policy soon from combating inflation to supporting growth, after mounting signs showed that weakening foreign demand is starting to take its toll on Asian exports.

  “We judge the rate hiking cycle to be virtually over and expect several central banks to be cutting next year,” Subbaraman wrote.
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