Tue, Jun 03, 2008 page12

• ANALYSIS: Central bank likely to tighten policy: analysts

  • By Kevin Chen / STAFF REPORTER
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  With a better economic outlook but growing inflation concerns ahead, the central bank is expected to further tighten its monetary policy "either at a faster pace or to a longer period," two Citigroup economists wrote in a research report released on Friday.

  Cheng Cheng-mount (鄭貞茂) and Tina Liao, who coauthored the Citi Investment Research report, said the central bank might raise its benchmark interest rates by 25 basis points later this month, followed by two 12.5-basis point rate hikes in September and December.

  Matt Robinson, an economist at Moody’s Economy.com, said in another report that the central bank would likely raise rates again at its quarterly board meeting this month to tackle inflation.

  “To cool demand-driven inflation, the central bank has no choice but to hike rates and give households more incentive to save,” Robinson wrote in the report that was also released on Friday.

  Sherman Chan (陳穎嘉), another Moody’s economist based in Sydney, said the central bank would probably make a “more aggressive” move to control inflation, “perhaps by announcing a 25-basis point interest rate hike following their next monetary policy meeting,” she wrote.

  These economists’ forecast for a rate hike came after the Directorate General of Budget, Accounting and Statistics on Thursday raised its consumer price index (CPI) growth forecast to 3.29 percent for this year.

  That was not only higher than the 1.98 percent it predicted in February, but the highest growth forecast since 1996. The government also revised its economic growth forecast for the year from 4.32 percent to 4.78 percent.

  The higher inflation forecast apparently took into account the Cabinet’s move last week to raise fuel and electricity prices, as well as its plan to resume the floating oil pricing mechanism next month.

  Last week, CPC Corp, Taiwan (CPC, 台灣中油) raised prices between 10.8 percent and 11.5 percent for unleaded gasoline products and 13.8 percent for premium diesel oil. The next day, private Formosa Petrochemical Corp (FPC, 台塑石化) matched the state-run company’s prices.

  Deutsche Bank economists have echoed their peers’ view that the higher inflation prospect might prompt the policymakers to hike rates one more time at this month’s meeting.

  “Further ahead, however, we expect economic growth to slow sufficiently and inflation to peak in the third quarter, to prompt the central bank to keep rates on hold for the remainder of the year,” Deutsche Bank’s economist unit said in an e-mail to the Taipei Times on Saturday.

  Starting in October 2004, the central bank has raised its discount rate for 15 consecutive quarters, reaching 3.5 percent at its March meeting. Economists and the market have speculated that the monetary authorities will wait until the release of last month’s CPI reading on Thursday to decide on the size of the planned rate hikes.

  Cheng and Liao said last month’s CPI would grow to a 16-year high of 4.4 percent year-on-year, largely because of the hike in fuel prices, after hitting 3.86 percent in April.

  “As gasoline accounts for 3.3 percent of headline CPI, the price jump in gasoline prices likely increased headline CPI by 0.5 percentage points during the month,” Cheng and Liao wrote in their report.

  Taiwan is one of a few regional economies that will face significant upside inflation pressure if the government decides to cut food and fuel subsidies by a large part over the next two to four quarters, Barclays Capital said in an inflation study released last week.

  Without such subsidies, Taiwan’s average CPI growth is likely to reach 4.3 percent this year, well above Barclays Capital’s previous 2.7 percent forecast, Sailesh K. Jha, a Singapore-based senior regional economist, said in the report.

  Jha believes the central bank will raise rates by a further 12.5 basis point this month, but he sees this upcoming hike as “a token measure” by the bank to signal its strong intent to fight inflation.

  “Our view is that interest rate increases are no longer effective at curbing inflation, which is cost push and largely imported in nature. We have also noticed that recent increases in the policy rates have largely not been transmitted onto market rates,” Jha wrote.

  “We maintain our view that in the coming months, the central bank will have to rely more heavily on allowing the exchange rate to appreciate to mitigate the impact of imported inflation,” he wrote.

  Despite concerns that a stronger local currency may trigger additional inflows of speculative capital, central bank Governor Perng Fai-nan (彭淮南) told the legislature on Friday that the bank prefers to use money supply control and the appreciation of the NT dollar to contain inflation.

  The NT dollar has risen 6.26 percent so far this year. It closed at NT$30.413 to the US greenback on Friday.
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