Central bank cuts Taiwan's 2022 GDP growth forecast to 3.75%

06/16/2022 11:09 PM
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Central bank governor Yang Chin-long (楊金龍). CNA file photo
Central bank governor Yang Chin-long (楊金龍). CNA file photo

Taipei, June 16 (CNA) The central bank announced on Thursday that it has lowered its forecast for growth in Taiwan's gross domestic product (GDP) in 2022 to 3.75 percent, citing the impact on private consumption from growing inflation.

The central bank cut the GDP growth forecast from the previous estimate of 4.05 percent made in March, saying in addition to worries over weakening private consumption, downside risks in the global economy are expected to increase the pressures faced by the local economy.

According to the central bank, an outbreak of indigenous COVID-19 infection that began in April also prompted many domestic demand-oriented businesses in the service sector to place their workers on unpaid leave, which further squeezed private consumption.

On the other hand, the export-oriented manufacturing sector is expected to benefit from solid global demand lending support to the local economy, the central bank said.

The move by the bank to downgrade its GDP growth forecast came after the Directorate General of Budget, Accounting and Statistics (DGBAS) cut its forecast in late May to 3.91 percent, below the 4 percent floor the government had previously anticipated.

As for rising inflationary pressure, the central bank expects Taiwan's consumer price index (CPI) to grow 2.83 percent, up from its previous estimate of 2.37 percent, while the bank also raised its forecast for growth in core CPI, which excludes fruit, vegetables and energy, from 1.93 percent to 2.42 percent.

The central bank said the higher CPI growth is largely caused by a spike in international crude oil and food prices.

To rein in growing inflationary pressure, the central bank raised its key interest rates by 12.5 basis points with the discount rate up to 1.5 percent, effective from Friday. It was the second consecutive quarter the central bank has hiked interest rates after a 25 basis point hike in March.

In addition, the central bank also decided to raise the required deposit reserve ratio, which is the proportion of deposits that regulators require a bank to hold in reserves and not loan out, by 25 basis points, effective from July 1. The move is expected to drain funds from the market, marking another way to reduce liquidity levels and inflation.

Compared with the U.S. Federal Reserve's decision on Wednesday to raise interest rates by 75 basis points, the local central bank's tightening was mild.

Commenting on the central bank's latest rate hike decision, governor Yang Chin-long (楊金龍) said while the bank is gearing up to fight inflation, it also has to take in account local economic growth at a time when the pandemic has taken a toll on private consumption.

As such, the central bank decided to raise the required deposit reserve ratio instead of a higher rate hike as the higher required deposit reserve ratio is expected not to have a direct impact on the local service sector, Yang said.

According to the central bank, the 12.5 basis point rise in interest rates and the 25 basis point increase in the required deposit reserve ratio should take about NT$120 billion (US$4.04 billion) out of the banking sector.

In addition, Taiwan faces milder inflationary pressures than the United States so the bank decided on a smaller rate hike this time, Yang said.

In May, Taiwan's CPI grew 3.39 percent from a year earlier, the highest growth in almost 10 years, marking the third consecutive month with an increase in excess of 3 percent. CPI growth remains well above the 2 percent alert set by the central bank.

In the United States, however, the May CPI soared 8.6 percent from a year earlier, the fastest increase in four decades.

However, as other major economies such as the U.S. and the United Kingdom have adopted a more hawkish monetary policy, Yang said, the local central bank will watch developments closely and observe whether such moves cause volatility in the the global financial markets.

"The latest rate hike was another difficult decision for the central bank," Yang said, adding that the bank does not rule out the possibility of holding extra policymaking meetings between June and September in a bid to respond promptly to global financial markets.

The central bank will continue to tighten its monetary policy to the end of this year, Yang said.

In response, Hsu Shu-po (許舒博), chairman of the General Chamber of Commerce of the Republic of China, said he is concerned that the smaller rate hike by the central bank will add downward pressure on the Taiwan dollar against the U.S. dollar as funds leave the country for greenback-denominated assets.

Under such circumstances, a fast depreciating Taiwan dollar is unlikely to serve the local economy well, Hsu added.

At the Thursday meeting, the central bank decided not to come up with additional selective credit control to cap home prices, though the bank said the rate hike is expected to reinforce the effects of the previous rounds of selective credit control it has implemented. At the March meeting, the central bank did not introduce any new measures for the home market either.

Since December 2020, it has undertaken four rounds of selective credit control measures in the local property market which have slowed down growth in home mortgage and loans to property developers, the central bank said.

Due to the COVID-19 pandemic, transactions of residential and commercial housing have slowed down in the six largest cities in Taiwan: Taipei, New Taipei, Taoyuan, Taichung, Tainan and Kaohsiung, the central bank said.

The bank said it will keep a close eye on the local property market and regularly review its credit controls in a bid to stabilize the financial market.

According to Great Home Realty, the latest rate hike is expected to boost mortgage payments by NT$585 a month for a home buyer with a NT$10 million mortgage.

(By Su Ssu-yun and Frances Huang)

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