Anti-inflation interest rate hikes likely

HEADWINDS:
The central bank is likely to be less aggressive in normalization as it lifts its benchmark discount rate toward 2 percent, a DBS Bank economist said

• By Chen Cheng-hui / Staff reporter

The central bank could raise interest rates by 12.5 basis points later this week to curb inflation, following a 25 basis-point increase in March, a DBS Bank Ltd economist said ahead of the monetary policymaker’s quarterly board meeting on Thursday.

Singapore-based Ma Tieying (馬鐵英) said in a report on Wednesday that she was expecting a less aggressive hike of 12.5 basis points because “growth headwinds have increased.”

At its March 17 meeting, the central bank decided to raise its benchmark discount rate by a larger-than-expected 25 basis points to 1.375 percent, its first rate hike in 10 years, as the bank sensed that high inflation could become entrenched if it did not take action.

Photo: Ashley Pon/Bloomberg

However, the disrupting impact of recent lockdowns in key Chinese manufacturing hubs was bigger than expected, Ma said, adding that Taiwan’s export orders fell 5.5 percent year-on-year in April, the first decline since February 2020, while the S&P Global Taiwan manufacturing purchasing managers’ index also dropped to 50 last month, the lowest reading for the nation’s factory activity over the past two years.

Furthermore, a local outbreak of the Omicron variant of SARS-CoV-2 has also weighed on domestic consumption and the service sector this quarter, with retail and recreation activities declining by about 15 percent from the middle of April to the end of last month, Ma said, citing Google mobility data.

“Beyond the short term, there are mounting concerns about a general global slowdown in 2023, in the aftermath of the supply-side inflation shock, monetary policy tightening and geopolitical tensions,” Ma said.

“As global growth uncertainties increase, the central bank is likely to adopt a more careful approach on its pace of monetary policy normalization in the remainder of this year and 2023,” she said.

The central bank may plan to pursue a gradual normalization approach to lift its benchmark discount rate further toward the 2 percent level in a bid to address the issue of negative “real” interest rates, Ma said, adding that she expects a sequential rate hike by the bank at its next seven policy meetings.

Negative real interest rates happen when the nominal interest rate is lower than the inflation rate, meaning that consumers’ purchasing power is weakening.

On the back of rising food and fuel prices, the consumer price index grew 3.39 percent from a year earlier last month, the highest since August 2012, the Directorate-General of Budget, Accounting and Statistics said on Tuesday.

However, inflation is different in Taiwan compared with the US, while local COVID-19 outbreaks have had an impact on domestic demand, so the central bank does not need to follow in the footsteps of the US Federal Reserve, said Dachrahn Wu (吳大任), director of National Central University’s Research Center for Taiwan Economic Development.

The Fed has begun raising interest rates aggressively, with another significant hike expected this week, as US policymakers attempt to combat inflationary pressures without triggering a recession.

Additionally, steep rate hikes would add financial burdens to households, such as increases in housing loans, causing people to reduce unnecessary consumption. As a result, corporate profits would decrease, Wu told the Chinese-language Liberty Times (the Taipei Times’ sister newspaper) on Sunday.