The central bank might raise interest rates sooner than expected, given current economic conditions, Daiwa Capital Markets Hong Kong Ltd said yesterday.
In its last quarterly policymaking meeting, held on March 27, the central bank kept its policy interest rates unchanged for the 11th straight quarter to spur economic growth.
The bank’s policymaking board members are scheduled to meet today at their quarterly meeting to decide if it is necessary to adjust the bank’s monetary policy.
Daiwa expects the bank to continue holding rates steady this time, with the discount rate at 1.875 percent, the rate of accommodations with collateral at 2.25 percent and the rate of accommodations without collateral at 4.125 percent.
However, the bank is likely to make its first rate hike of 12.5 basis points at the end of this year, rather than in the first quarter of next year, Daiwa said in a research report, citing an improving economic outlook for the second half of the year.
“Stronger GDP growth could prompt the central bank to start normalizing interest rates earlier than we previously forecast,” Daiwa economist Christie Chien (簡民惠) wrote in the report.
Daiwa is among several foreign banks and domestic research institutes that have seen signs of improved economic activity, such as the end of the destocking cycle, a revival in private consumption on the back of improved labor-market conditions and strong inbound tourism growth.
JPMorgan Chase Bank, for instance, on Monday said constructive global growth outlook would further support the nation’s export and manufacturing sectors in the second half of the year, in the wake of the government’s latest data, which showed stronger industrial production and export orders last month.
Yesterday, the Taiwan Institute of Economic Research (TIER, 台灣經濟研究院) said in a separate report that domestic manufacturing and service sectors showed signs of continued recovery last month and more local companies said they have become more upbeat about the economic outlook over the next six months.
Daiwa expects the economy to expand by 3 percent this year, higher than its previous estimate of 2.7 percent growth.
JPMorgan has put its forecast for GDP growth at 3.5 percent this year, while TIER kept its economic growth estimate at 3.23 percent.
However, Chien said that it is uncertain if these favorable factors will persist and the weaknesses in the emerging markets, especially China, could offset demand growth in advanced economies.
Moreover, increased exposure to China’s credit risk could be another threat for Taiwan, she said.
As of the end of March, Taiwanese banks’ outstanding international claims to China totaled US$48.85 billion, up from US$45.88 billion at the end of last year and making China the nation’s largest debtor, according to the central bank’s tallies.
“Although the likelihood of a financial crackdown in Taiwan remains small, the rise since 2012 in the outstanding amount of domestic banks’ claims on China is still a worry, especially as credit conditions in China could deteriorate in 2015 on the back of a Fed rate hike that eventually would drain liquidity out of the mainland,” Chien wrote.
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