The central bank on Thursday raised its policy rate by 0.125 percentage points, which was contrary to a Bloomberg poll in which most analysts surveyed forecast no change. The unexpected rate hike came as inflation remains sticky, and the bank aims to drive it back toward its 2 percent target. Clearly, inflation remains a problem in Taiwan, especially core inflation, and people expect consumer prices to climb again after the government announced it would raise electricity rates next month.
The consumer price index (CPI) rose 2.74 percent in the first two months of the year from a year earlier, mainly due to the rising costs of food and dining out, as well as entertainment and rent, Directorate-General of Budget, Accounting and Statistics data showed. That is higher than the 2.60 percent increase in the fourth quarter of last year. Meanwhile, the core CPI — which excludes vegetable, fruit and energy prices — grew 2.77 percent over the two-month period, compared with a 2.85 percent rise in the fourth quarter.
Although raw material prices including crude oil are falling from their peak levels last year, easing the pressure of imported inflation, the central bank said that the resumption of normal activities after the lifting of most COVID-19 restrictions and the easing of a global outbreak of avian flu would increase the costs of entertainment and dining out, which tend to rise easily, but not go down.
Considering the stickiness of inflation in the services industry and the uncertainties about domestic prices for the rest of the year, the central bank on Thursday stressed the importance of containing inflation expectations and lifted its CPI forecast to 2.09 percent for this year, up from its previous estimate of 1.88 percent, but still lower than last year’s 2.95 percent.
The government has adopted several measures to help ease price increases, such as temporarily halting business taxes on imported corn, wheat and soybeans, halving import tariffs on butter and milk powder, reducing commodity taxes on gasoline and diesel, and investigating allegations of price gouging and hoarding in the food sector. Nevertheless, households could still face rising costs of living due to the spillover effect of higher electricity rates.
At a news conference after the bank’s quarterly board meeting on Thursday, central bank Governor Yang Chin-long (楊金龍) said the effects of higher electricity rates on CPI are definitely greater than that of rising egg prices.
He was correct that even if egg prices soared 30 or 40 percent, they would not constitute a high proportion of average household spending. However, rising electricity rates are bound to further spur inflation as businesses pass extra energy costs on to customers.
As the increase in electricity prices could have a wider influence on inflation due to its knock-on effects, the government should adopt timely measures to maintain balance in the supply and demand of goods, as well as halt electricity rate hikes for most households and small businesses.
As current price pressures are mainly from rising food, rental and services costs, Yang said the bank’s latest rate hike was appropriate and moderate. Rate decisions would remain data-dependent and could also factor in the lagged effect from the bank’s cumulative rate increases since March last year, the spillover effects of monetary tightening by other major economies, and the fallout from banking turmoil in the US and Europe, he said.
Given an expected deceleration in inflation buildup and increased growth risks, the central bank’s one-year-long rate hike cycle is likely nearing an end. Keeping GDP growth above 2 percent this year is another daunting challenge for policymakers as uncertainties in the global economy seem likely to persist in the near term.
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