The central bank on Thursday last week kept its benchmark policy rate unchanged at 2 percent for the eighth consecutive quarter, after board directors met for the first time since the US and Israel launched attacks on Iran late last month. The decision was unanimous and aligned with market expectations. It appeared that policymakers did not want to provoke a significant market reaction as they wait to see how the Middle East conflict affects Taiwan’s economy and consumer prices. Attention now turns to whether the central bank would take pre-emptive tightening measures — and when — as the war in the Middle East persists.
Central bank Governor Yang Chin-long (楊金龍) told reporters after the meeting that central banks around the world have generally adopted a more hawkish stance in response to a surge in international oil prices due to the war. Although Yang said a pre-emptive rate hike was not warranted for Taiwan, he signaled a shift toward a tightening bias as the bank continues to monitor the situation in the Middle East. The key takeaways from his news conference were that the second quarter would be a key period and that the bank was ready to act if higher oil prices begin to feed into inflation expectations.
Meanwhile, the central bank raised its GDP growth forecast for this year to 7.28 percent, up from 3.67 percent, citing that strong demand for artificial intelligence and other emerging technologies would continue to support exports and investment, while private consumption growth is also expected to pick up. The more meaningful upgrade was for inflation, with headline inflation and core inflation forecasts for this year revised higher to 1.8 percent and 1.75 percent respectively, up from 1.63 percent, partly reflecting the rising price of energy amid Middle East tensions.
Oil price hikes are a major point of inflation. West Texas Intermediate crude oil futures, the US benchmark, last week briefly topped US$100 a barrel in New York, while the international oil benchmark, Brent crude, ended the week above US$110 a barrel in London. The central bank projects that the average oil price would be US$85 a barrel this year, significantly higher than its previous assumption of US$58.3 per barrel. However, the key point is the effect downward pressure and worsening conditions caused by higher oil prices — as well as the second-round effects of supply disruptions across many industries — could have on the economy.
Another area of focus is the New Taiwan dollar’s exchange rate, as a weaker local currency pushes up import costs. Uncertainty from conflicts in the Middle East has heightened volatility in international financial markets and prompted foreign institutional investors to significantly reduce their Taiwanese stock holdings and remit funds out of the country. That has adverse implications for the domestic foreign exchange market, with the NT dollar last week dropping for a third consecutive week against the US dollar to NT$31.97 — a low not seen since May last year. The central bank now projects that a 2 percent depreciation in the NT dollar could lead to a 0.05 to 0.15 percentage-point increase in inflation, Yang said.
Obviously, the central bank faces a critical situation if energy prices rise substantially over an extended period. Some say that if the central bank raises its policy rate, even as soon as at its next board meeting in June, it could slow the economy, but then if it does not, it could accelerate inflation. For others, they are confident that the central bank still has room to tighten monetary policy if inflation accelerates, given the nation’s strong economic fundamentals. There has been no clear signal about the bank’s next move following Yang’s news conference and the central bank’s statement issued on Thursday, even though the risk of tightening has clearly increased.
The situation in the Middle East is causing significant uncertainty about the outlook for Taiwan’s economy and inflation, but people should not panic over the oil price spike. Other factors need to be monitored, including the impact of US trade policies, monetary policy adjustments by other major central banks, the pace of supply-chain deployments and trade flows, and the development of artificial intelligence and other emerging technologies. Despite this much uncertainty, it is better to reserve the term “stagflation” for a much more serious set of circumstances.
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