The central bank is expected to leave its key interest rates unchanged for the ninth consecutive quarter due to the ongoing war in the Middle East, economists said, ahead of the bank’s upcoming policymaking meeting slated for Thursday.
Amid the Middle East conflict, global energy prices have surged, with crude oil topping US$100 per barrel, which has raised concerns over inflation and the global economy, the economists said.
The central bank’s benchmark discount rate is at a 15-year high of 2 percent, and the rate on accommodations with collateral is 2.375 percent, while the rate on accommodations without collateral is 4.25 percent.
Photo: Ann Wang, Reuters
Cathay United Bank Co (國泰世華銀行) chief economist Lin Chi-chao (林啟超) over the weekend said that the central bank needs more time to observe the Middle East situation, and its board members are likely to focus on the wild fluctuations of crude oil prices.
Any sustained increase in energy prices would push up shipping costs, which in turn would result in higher product prices, he said.
Minister of Economic Affairs Minister Kung Ming-hsin (龔明鑫), who sits on the central bank’s board, is likely to address the volatile global situation at Thursday’s meeting, Lin added.
While inflation is the central bank’s main concern, rising energy prices would not immediately affect local consumer prices, as the Ministry of Economic Affairs has an energy price stabilization mechanism in place, Taiwan Institute of Economic Research (台灣經濟研究院) economist Wu Meng-tao (吳孟道) said.
Taiwanese consumers are not likely to feel the effects of soaring energy prices until the second half of the year, Wu said, echoing Lin’s view that the central bank would maintain its monetary policy for the time being.
However, fixed-income investors are pricing in a rate hike in Taiwan in the coming months as surging oil prices and a weakening New Taiwan dollar spark inflation concerns.
Taiwan’s one-year interest-rate swaps climbed to the highest level on record last week, Bloomberg-compiled data showed, signaling expectations of at least one rate hike over the next 12 months.
Before the Iran war started, the probability of such a move was less than 50 percent.
The central bank closely monitors the NT dollar’s nominal effective exchange rate (NEER) to ensure it does not deviate significantly from its 36-month moving average. The NEER — a gauge of the local currency’s strength against those of its major trading partners — has fallen to an 11-month low.
A weaker NT dollar has often been associated with higher inflation after a lag of several months, based on rolling correlation analysis. The local currency’s NEER has fallen nearly 9 percent from last year’s high, suggesting inflationary pressures could build if the historical relationship holds.
At Thursday’s meeting, the central bank is likely to raise GDP and inflation forecasts, BNP Paribas SA economist Jeeho Yoon and strategist Franco Hsu wrote in a note.
“Recent economic data point to hawkish risks, in our view,” they said.
They estimate Taiwan’s economy would expand 5.9 percent this year.
The analysts also see upside risk to their headline and core inflation forecasts of 1.7 percent and 1.8 percent respectively for this year, “especially with the recent geopolitical risks,” they wrote.
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