The central bank yesterday raised interest rates by 0.25 percentage points to help curb inflation, which has gained momentum since Russia invaded Ukraine, with prices for crude oil and raw materials skyrocketing.
The time is ripe for rate hikes, as the service sector is on a stable course of recovery and global hot money has fled the local market amid mounting geopolitical tensions, central bank Governor Yang Chin-long (楊金龍) said.
The first rate hike in 10 years surprised the market, as most financial institutes forecast two mild increases of 0.125 percentage points from the second quarter.
Photo: CNA
The discount rate was increased from 1.125 percent to 1.375 percent, effective today.
“The rate hike is intended to tame inflationary pressures, although it would also increase mortgage burdens for home owners,” Yang told a news conference after a quarterly board meeting.
The rate hike would translate into an extra NT$19,075 (US$670.33) a year on average for home owners with a NT$7.63 million mortgage.
That is why the central bank refrained from introducing new property market credit controls, but there is room for tightening if that becomes necessary, he said.
The price for crude oil has soared from US$70 per barrel in January to more than US$100 per barrel this month, Yang said.
If the trend persists, it would weigh on Taiwan’s economy, he said, adding that rate hikes are the most effective measure to tackle supply-side inflation.
The central bank expects the consumer price index (CPI) to spike at 2.37 percent this year, up from the 1.59 percent it projected in December last year, while core CPI, which excludes volatile food and energy prices, would rise 1.93 percent, it said.
While it is too early to gauge the fallout from the war, it appears to have more bearing on inflation, especially for Europe, than on economic fronts, Yang said.
Taiwan imports more than 90 percent of its oil, but from suppliers other than Russia.
Against that backdrop, the central bank raised its forecast for GDP growth this year slightly to 4.05 percent from 4.03 percent.
The tweak would be more evident if there were no war, it said.
Taiwan’s rate hike came after the US Federal Reserve made the same move overnight and indicated six more adjustments this year.
Taiwan, which is small and open, does not need to follow a large and closed economy, Yang said.
A strong New Taiwan dollar in the past few years had a tightening effect on the external front, the governor said.
Heightening geopolitical tensions have prompted foreign players to cut holdings in local shares and allowed the NT dollar to soften, giving the central bank comfort to raise interest rates, he said.
Yang earlier voiced concern that rate hikes could attract hot money, which caused the local currency to go from NT$30 against the US dollar in early 2020 to NT$27.6 in January.
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