POSITIVE OUTLOOK:
The central bank might increase the deposit reserve ratio to tame inflation and might forgo additional rate hikes in December if inflation slows
The central bank would likely hike key interest rates by 12.5 basis points (bp) on Thursday amid slowing inflation, economists said.
The bank is expected to be less aggressive than the US Federal Reserve, as the inflation rate in Taiwan last month rose 2.66 percent, the lowest since February’s 2.33 percent, Taiwan Academy of Banking and Finance (台灣金融研訓院) economist Jerry Lin (林士傑) said.
Local consumer prices could further stabilize this year as the prices of industrial and agricultural goods decline on the global market, the Directorate-General of Budget, Accounting and Statistics has said.
Photo: George Tsorng, Taipei Times
The Fed is expected to raise key interest rates by 75 basis points following a Federal Open Market Committee meeting that is to end on Wednesday, Lin said.
The Fed’s continued hawkish approach is an attempt to quell skyrocketing inflation in the US, which reached 8.3 percent last month, beating market expectations of 8.1 percent growth, Lin said.
Lin said Taiwan’s central bank might take additional anti-inflationary measures, such as a 25-basis-point increase to the required deposit reserve ratio, which is the fraction of deposits regulators require banks to hold in reserves, and not lend.
At its June meeting, the central bank raised interest rates by 12.5 basis points, with a discount rate of 1.5 percent, and also hiked the required deposit reserve ratio by 25 basis points to reduce liquidity on the market.
Since starting a rate hike cycle in March, the Fed has raised interest rates by 225 basis points, while Taiwan’s central bank has only increased rates by 37.5 basis points.
Lin said if Taiwan’s inflation continues to moderate, the central bank might leave interest rates unchanged at a quarterly policymaking meeting in December.
However, a 12.5-basis-point hike would be possible in December if consumer prices continue to rise, he added.
Chung-Hua Institution for Economic Research (中華經濟研究院) vice president Wang Jiann-chyuan (王健全) said he also expects the central bank to raise rates by 12.5 basis points this week.
However, Wang added that the widening rate gap between Taiwan and the US could create problems for the local central bank by driving foreign funds out of Taiwan.
On Friday, continued fund outflows driven by expectations of an aggressive Fed hike boosted the US dollar, which rose NT$0.163 against the New Taiwan dollar to NT$31.293, its highest level since NT$31.365 recorded on Sept. 4, 2019.
Taiwan Institute of Economic Research (台灣經濟研究院) economist Wu Meng-tao (吳孟道) said Taiwan’s relatively small and export-orientated economy means the central bank is unlikely to act as aggressively as the Fed.
Fubon Financial Holding Co (富邦金控) chief economist Rick Lo (羅瑋) said the Fed is likely to raise rates by 50 basis points in November and 25 basis points in December following an expected 75-basis-point hike this month.
Lo said a December hike would signal the end of Fed’s rate hike cycle for this year, which would see it raise key interest rates by 375 basis points.
A more hawkish approach could hurt the US economy and have an adverse effect on other economies, Lo said.
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