The central bank on Thursday announced that it would raise its benchmark discount rate by a larger-than-expected 25 basis points to 1.375 percent, effective on Friday, joining many of its global peers in normalizing its monetary policy. It is the bank’s first rate hike in 10 years, and the first increase in the face of fallout from the COVID-19 pandemic and inflationary pressure.
The move came earlier than expected, just hours after the US Federal Reserve announced a rate hike of 25 basis points. Most economists had forecast a sequence of rate hikes by the bank to start in the second quarter of the year.
The central bank had considered economic and financial factors at home and abroad, including a surge in global energy and commodity prices, pressure from imported inflation on the consumer price index (CPI), a gradual recovery in the COVID-hit services sector, improvement in labor market conditions and rate normalization in other economies, such as the US, the bank said in a statement after its quarterly board meeting on Thursday.
After the latest hike, the bank’s policy rates — the discount rate, the rate on refinancing of secured loans and the rate on temporary accommodations — returned to the level of March 2020, before COVID-19 erupted.
Subsequent rate changes — whether they involve bigger or faster increases — will depend on how monetary policymakers view the trajectory of consumer prices over the next few months, as manufacturers pass on higher energy and commodity costs.
However, the central bank’s statement emphasized that elevated inflation would be a persistent trend, with headline CPI expected to stay above the 2 percent threshold through the third quarter.
The bank has formally begun tightening its monetary policy. It is keeping the door open to more hikes this year, saying that it plans to make timely and appropriate adjustments to its monetary policy based on the upside risk of global inflation, the monetary policy of major economies and geopolitical risks.
People have started to question how all the uncertainties facing the world will affect the nation’s economic growth, and how the bank’s tightening will impact real-estate lending and the housing market.
Although the bank’s board meeting did address concerns over the invasion of Ukraine and the sanctions against Russia, the bank seems most concerned about managing imported inflation stemming from geopolitical factors. The bank has maintained a resilient outlook for Taiwan’s economic growth this year, saying that it expects the Russia-Ukraine conflict to have more of a negative effect on inflation in Taiwan than on economic growth.
The central bank said that other concerns for the economy include outbreaks of new variants of SARS-CoV-2 and the effects of climate change, as they could result in higher global inflation, negatively affect economic activity and trigger more volatility in global financial markets — all requiring timely and effective responses from the policymakers.
With economic momentum and inflation the top priorities of the central bank, the sooner it raises rates, the sooner it could cap inflation, while taking the opportunity to moderately curb housing prices.
Raising rates by 25 basis points does not significantly affect real-estate lending or drastically increase the financial burden of mortgage holders, but it shows that the central bank has other tools in addition to the selective credit controls introduced in December 2000. It underscores that the central bank has bolder actions in its policy pipeline if the housing market turns sour.
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