The US Federal Reserve and Taiwan’s central bank unveiled their latest monetary policy decisions last week. Key interest rates remained unchanged from their previous policy meetings and were in line with market expectations. Interestingly, investors said that the remarks made to the media by US Fed Chairman Jerome Powell and Taiwan central bank Governor Yang Chin-long (楊金龍) were quite hawkish, fueling expectations of an extended high interest rate environment either in the US or Taiwan.
As expected, the Fed on Wednesday last week kept the target range for the federal funds rate unchanged at 5.25 to 5.5 percent. It was the second pause in the US central bank’s rate hike cycle after having raised the rate for 10 consecutive meetings before taking a pause in June. In addition, the Fed signaled there would be one more rate hike by the end of this year, while its policy members’ “dot plot” graphic also indicated that more members expected the policy rate to remain above 5 percent next year.
The Fed’s intention to hold the policy rate higher for longer would ensure no price re-acceleration in the months ahead. Therefore, the Fed’s rate cuts next year might not come any time soon, contrary to what many people had expected. That is because the Fed’s policy members expect inflation to remain elevated, as they have yet to win their battle against it. In other words, the Fed is still strongly committed to returning inflation to the bank’s 2 percent target while achieving a soft landing for the US economy.
In Taiwan, the central bank at its latest quarterly board meeting on Thursday last week kept its discount rate at 1.875 percent, as economic growth remains the bank’s priority while inflation has largely followed a moderating trend. That was the second consecutive quarter that the central bank has stayed put after having hiked its policy rate a total of 75 basis points in the current tightening cycle, in addition to two 25 basis point hikes to local lenders’ reserve requirement ratio last year to tighten liquidity.
However, the central bank delivered a hawkish tone at a news conference after its board meeting, with Yang emphasizing the need to remain vigilant regarding inflation and suggesting the bank’s monetary tightening would last longer than expected. Inflation data showed that the consumer price index (CPI) grew 2.52 percent year-on-year last month, while core CPI remained sticky with a 2.6 percent rise, with signs of elevated inflation likely in the near term.
Also, even though the bank’s changes to its forecasts for inflation — lowering its CPI growth estimate this year to 2.22 percent from 2.24 percent, but raising the core CPI increase to 2.44 percent from 2.38 percent — were more modest compared with its GDP growth forecast, which it downgraded to 1.46 percent from 1.72 percent. Its growth predictions of 1.83 percent in CPI and 1.73 percent in core CPI next year are slightly lower than its 2 percent target.
Moreover, Yang said Taiwan’s consumer prices had been relatively low and stable in the past, with CPI growing at about 1 percent on average for many years.
However, he hinted that long-term CPI growth would likely come in at 1.5 percent, or even 1.5 to 2 percent on average, if structural factors such as climate change, geopolitics, the aging population and globalization are included. In that scenario, Yang said it would naturally lead to a higher interest rate, meaning that inflation risks warrant continued monitoring, as they affect wages, production, housing availability, consumer purchases and overall business costs.
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