Beware of the risk posed by rising inflation. That was the key message from the central bank’s quarterly board meeting on Thursday, when board members agreed unanimously to leave the bank’s key interest rates unchanged, as they believe inflationary potential exists and the domestic economy should continue to grow at a moderate pace.
The central bank made it clear that inflationary risks could intensify as geopolitical tensions in the Middle East and market speculation drive global crude oil prices higher, with domestic electricity and fuel prices possibly rising because of the steep increase in input costs.
The government’s forecast is for headline inflation to rise to 1.46 percent this year. That is slightly higher than last year’s 1.42 percent, and the central bank said concerns that inflation could immediately take off were unwarranted.
It is the third straight quarter that the central bank decided to hold its key policy rates unchanged, demonstrating its confidence in the nation’s economy. Just last week, official data showed that the average unemployment rate for the first two months of the year edged down 0.45 percentage points year-on-year to 4.22 percent, while industrial output rose 8.4 percent year-on-year last month, ending three consecutive months of declines.
Consumer price stability, which the central bank highlighted on Thursday, is hardly a new theme. However, hearing central bank Governor Perng Fai-nan (彭淮南) say that the bank’s “top priority” is to maintain price stability signaled a departure from its previous focus and concern over the impact of a lackluster global economy on Taiwan’s export-reliant economy.
This shift from a pro-growth policy to an inflation-wary one also indicates that interest-rate cuts are not high on the bank’s agenda. It is increasingly likely that the bank will only hike rates if it sees significant cost-push inflationary pressure at home.
However, as most wage earners’ salaries have remained stagnant over the past few years, with official data showing that the average monthly salary dropped 1.42 percent year-on-year to NT$34,205 in January in real terms, it would be difficult for producers to pass on cost increases to consumers, who might switch to low-priced substitutes. It is thus looking less likely that cost-push inflation would intensify in the near future. Another variable that might affect the central bank’s monetary policy at future board meetings is whether an adjustment in rates could create a negative “real” interest rate environment — where nominal interest rates are lower than the rate of inflation — and thus weaken consumers’ purchasing power.
The real interest rate is currently still above the bank’s “neutral” level and higher than those in many major economies around the world, such as South Korea, the EU, the US, Singapore and Hong Kong. As long as the real interest rate remains positive, the central bank has no urgent need to raise policy rates.
Aside from interest rates, the central bank faces another inflation-related challenge: whether it should allow the New Taiwan dollar to strengthen. Perng did not elaborate on this on Thursday. Instead, he reiterated that the bank would step into the currency markets whenever it witnesses excessive volatility and disorderly movements in the NT dollar, which could have an adverse impact on the nation’s economic and financial stability.