The central bank should first seek to stabilize the local currency to combat inflation, as aggressive interest rate hikes would hurt the economy, academics said.
As fears over recessions in major economies heighten, inflationary pressures would subdue, giving the central bank room to reconsider its pool of policy tools, economics professor Lin Cheing-fu (林建甫) told an online seminar in Taipei on Thursday.
“The monetary policymaker should give its top priority to stabilizing the New Taiwan dollar to ease imported inflation and save interest rate hikes as a secondary instrument,” Lin said.
The local currency yesterday slid past NT$30 to close at NT$30.02 against the US dollar, the lowest in 26 months, as the US Federal Reserve is set to raise interest rates again next month to curb inflation, based on the minutes of its previous policy meeting.
Taiwan’s central bank would be forced to raise interest rates to narrow the rate differences, but a stable foreign exchange rate can also help tame inflation, especially inflation fueled by higher prices for imported goods, Lin said.
Taiwan’s inflation is mainly driven by sharp increases in imported energy and raw material prices, government data show.
The central bank would slow its pace of monetary tightening by raising interest rates by another 0.125 percent this year in light of the economic uncertainties, Taishin Financial Holding Co (台新金控) chief economist Mason Li (李鎮宇) said.
Regardless of the magnitude of the rate hikes, the effect on inflation would be limited, Li said.
Christina Liu (劉憶如), a professor of finance and economics, said rate hikes usually take a toll on GDP growth, as currently seen in the US, where the economy has contracted for the past two quarters.
Steep and fast interest rate hikes in the US have squeezed budget for private consumption, driving tech and real-estate companies to cut head counts to stay afloat, Liu said.
The trend could spread to other sectors, making a hard landing increasingly unavoidable, Liu said.
Private sectors had better practice belt-tightening and turn conservative about investment and expansion in such times, Liu said.
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