The central bank might find it difficult to achieve its objectives of spurring economic growth and reducing inflation, as Taiwan is likely to face greater economic headwinds than previously expected.
The results of a survey released yesterday by the Taiwan Institute of Economic Research (TIER) showed that the manufacturing sector is heading toward a recession, with 70 percent of polled firms expecting their businesses to contract.
TIER said demand for Taiwanese products in the US, the EU and China has weakened amid global inflationary pressures, monetary policy tightening and stock market routs.
The institute last week downgraded its GDP projection for this year by 0.33 percentage points to 2.58 percent. That is lower than the 2.75 percent expansion the Directorate-General of Budget, Accounting and Statistics (DGBAS) estimated last month. Some economists are even more pessimistic, forecasting roughly 2 percent growth for this year, lower than last year’s 2.34 percent.
Amid the glum outlook, the central bank might rein in interest rate hikes to spur economic growth. The bank in December raised its rediscount rate by 0.125 percentage points. During its most recent quarterly meeting, three of the bank’s 19 board directors voted to increase the rate by 0.25 percentage points to curb inflation.
The nation’s consumer price index climbed to 2.95 percent last year, well above the central bank’s 2 percent target. Surges in food and vegetable prices pushed up the cost of dining out by 5.77 percent annually.
Although the DGBAS expects inflation to ease to 1.86 percent this year, central bank Deputy Governor Chen Nan-kuang (陳南光) has said that inflation has been significantly underestimated.
Chen this month in two separate articles in the Taiwan Banker magazine wrote that Taiwan’s relatively tame inflation is due to the long-term limitation of electricity and fuel price increases.
He suggested that the central bank play a more active role in taming inflation by implementing strict monetary measures, saying that the nation could otherwise face the thornier issue of deflation.
The government is facing the challenge of keeping inflation within the central bank’s 2 percent target. State-run Taiwan Power Co (Taipower) said that it would seek price hikes after incurring a record loss of NT$267.5 billion (US$8.92 billion at the current exchange rate) last year, due to rising global oil and coal prices. To meet the government’s policy of keeping consumer prices low, Taipower did not fully pass increases in fuel costs on to customers.
The utility in the second half of last year raised electricity fees by 15 percent only for heavy users, while keeping fees unchanged for households, schools and small-scale enterprises. It expects its losses to rise to NT$278.5 billion this year, if no action is taken.
CPC Corp, Taiwan also limited gasoline and natural gas price increases last year, resulting in losses of more than NT$210 billion. Although global oil prices have since stabilized, they are still placing a strain on CPC’s budget, the state-owned refiner said.
The Ministry of Economic Affairs said the price hike limitations have helped prevent inflation from surging above 3 percent last year, dismissing criticisms of the price policy.
However, it would be difficult for Taipower and CPC tolimit price increases this year as they come under pressure to turn around their businesses. That would make it challenging to bring inflation to the 1.86 percent level forecast by the DGBAS.
As Taiwan’s exports falter and inflation looms large, the central bank might need to devise creative policies to tackle the twin problems of a shrinking economy and rising consumer prices.
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