Central bank likely to raise interest rates by 0.125 percentage

• By Crystal Hsu / Staff reporter

Taiwan’s central bank is likely to raise interest rates by 0.125 percentage points on June 16 as it struggles to curb inflation without hurting an economy that is facing increasing headwinds, a Taipei-based economist said.

Taiwan’s consumer price index, hovering above 3 percent for the past two months, is not as serious as the 8 percent seen in the US and the EU, meriting a measured and moderate approach, said Chang Chuang-chang (張傳章), president of the Chunghua Institution for Economic Research (CIER, 中華經濟研究院).

Several central bank board members shared the same opinion during the bank’s March meeting, but decided on an interest rate hike of 0.25 percentage points.

Photo: CNA

Chang said that the central bank is now in a difficult position as it also must tackle growing economic downside risks induced by China’s COVID-19 restrictions and spikes in energy and raw material prices.

Manufacturers across all sectors are pessimistic about business prospects in coming six months, given the latest manufacturing purchasing managers’ report, while COVID-19 infections locally are diminishing business in finance, retail, restaurants, hotels and transportation, Chang said.

The backdrop renders a slight rate hike of 0.125 percentage points a wise option to curb inflation and slow capital flight, he said.

Global funds have swiftly left emerging markets this year to purse better yields in the US, where the US Federal Reserve has made clear it would raise interest rates by 0.5 percentage points in upcoming policy meetings.

Rate hikes are not the only policy tool in battling inflation, and Taiwan’s central bank does not need to follow the Fed’s lead, Chang said.

The Directorate-General of Budget, Accounting and Statistics last month trimmed its forecast for the nation’s GDP growth this year from 4.42 percent to 3.91 percent, reflecting unfavorable economic uncertainty, he said, adding that steep rate hikes would add financial burdens to an average family.

More than 70 percent of Taiwanese families have mortgage obligations, and interest rate hikes would increase their monthly payments, CIER vice president Wang Jiann-chyuan (王健全) said.

Interest rates for mortgage payments could rise to 2 percent next year, creating significant pressure on the housing market if the central bank hikes interest rates for the rest of this year, Wang said.

The central bank is adopting a hawkish policy stance to narrow the interest-rate gap between Taiwan and the US, which is causing ongoing capital flight, Wang said.