Almost all of the central bank’s board members favored a rate hike of 0.125 percentage points to rein in inflation expectations that might run wayward after scheduled electricity tariff increases last month, the minutes of the quarterly board meeting in March showed yesterday.
One board member who supported the rate hike said that inflation expectation plays a dominant role in monetary policymaking because such expectations are difficult to contain.
Given that Taiwan’s consumer price index (CPI) has climbed above 2 percent for several years, the issue of inflation expectations must not be taken lightly, the member said.
Photo: Reuters
“There needs to be countermeasures in place because the April electricity tariff hikes could lead businesses to follow suit and feed inflation expectations,” the member said.
A rate hike of 0.125 percentage points would send the market a message that the central bank takes its mandate of maintaining price stability seriously and further rate hikes would be necessary,= if inflation remains elevated, the member said.
Another board member voiced similar views, saying that the electricity tariff adjustments would push CPI growth this year above the 2 percent alert level.
Against this backdrop, a rate hike of 0.125 percentage points would reaffirm the central bank’s resolve to contain inflation expectations.
Another board member also supported the proposition, saying that a rate hike would be a good policy move if it helps pre-empt or tame price upswings.
Another board director said that Taiwan’s CPI has remained above the 2 percent level for some time and the increases in rent and eating out costs are to blame.
The two consumption categories have risen by 4 percent every month since February 2022, the member said, voting in favor of a rate hike.
Still another board member said that Taiwan’s real interest rate remains in negative territory, suggesting room for monetary tightening and a rate hike of 0.125 percentage points would help keep inflation expectations anchored.
One board member preferred a faster rate hike of 0.25 percentage points, saying that insufficient monetary tightening previously likely explained why inflation pressures remain elevated today.
The situation could worsen in April when the electricity rates rise across the board to keep lossmaking Taiwan Power Co (台電) afloat, the member said at the time.
The nation’s low and stable unemployment rate should give the central bank comfort to tighten interest rates, the member said.
One board member disagreed, saying that only a few firms in Taiwan have benefited from strong global demand for artificial intelligence devices and most other sectors continue to struggle with a business slowdown.
A rate hike is inappropriate at this juncture because it would drive up corporate borrowing costs and cause further hardship for companies, which have to bear extra product costs due to the electricity rate increases, the member said.
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