The central bank yesterday unexpectedly raised its policy rate by 0.125 percentage points in a bid to ward off inflation, which is expected to gain speed after an across-the-board increase in electricity rates next month.
“The move was a surprise, with one director who favored a policy hold opposing it, but all other [directors] backed it to curb inflationary expectations,” central bank Governor Yang Chin-long (楊金龍) told a news conference in Taipei after the bank’s quarterly policymaking meeting.
The monetary policymaker is now forecasting a 2.16 percent increase in the consumer price index for this year, up from the 1.89 percent it forecast in December last year.
Photo: CNA
It expects GDP to grow by 3.22 percent, slightly faster than its previous estimate of 3.12 percent.
Research institutes at home and abroad expected the central bank to hold rates steady, as the US Federal Reserve and the European Central Bank (ECB) have opted to maintain the status quo and hinted that rate cuts might come later this year.
“It is better to tame inflationary expectations before they take root, which would then become difficult to tackle,” as the central bank cannot ignore the impact of the coming electricity price hikes, Yang said.
The Ministry of Economic Affairs is holding an electricity price review committee meeting today to decide on price adjustments. The new rates are to take effect next month to help keep debt-ridden Taiwan Power Co (Taipower, 台電) afloat.
The pace of the interest rate hike assumes a 10 percent increase in electricity rates, Yang said, adding that there is little room for further tightening, as its peers are mulling monetary easing.
The central bank decided to raise its discount rate to 2 percent, which Yang said remains moderate, as the bank has adopted a gradual approach in fighting inflation, whereas the Fed and ECB chose a drastic strategy.
Effective today, interest rates for secured lending would rise to 2.375 percent and borrowing costs for unsecured loans would climb to 4.25 percent.
The central bank did not introduce new measures to cool the property market, saying that the latest rate hikes and previous credit controls on domestic lending should keep mortgage operations and asset quality at healthy levels.
Despite the surprise rate hike, Yang dismissed concerns over the inverse relationship between Taiwanese equities and the New Taiwan dollar’s exchange rate.
The local currency has softened against the greenback this year even as the TAIEX soared to new heights, closing above 20,000 points yesterday for the first time in history.
Foreign institutional players tend to buy local shares via foreign exchange swaps — moves that would not affect the NT dollar, Yang said, adding that they recently realized gains from locally listed exchange-traded funds (ETFs) that offer high dividends.
The NT dollar has also weakened due to aggressive purchases by local investors of ETFs targeting US bonds, the governor said.
Yang hesitated to comment if the rate hike was meant to calm the stock market fever except to say that a bull market lends support to the wealth effect.
In the US, the wealth effect usually stems from property price gains, he said.
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