COST OF LIVING/Taiwan's central bank forecast to raise rates by 25 basis points by year-end

Taipei, July 16 (CNA) The local central bank is expected to further raise its key interest rates by 25 basis points by the end of this year to take on rising inflation, according to Taiwan Ratings, which has upgraded its forecast for the country's consumer price index growth to 3.2 percent for 2022.

A local partner of S&P Global Ratings, Taiwan Ratings said earlier this week that it was possible for Taiwan's central bank to raise the discount rate to 1.75 percent by the end of this year, indicating there will be a 25-basis point increase from the current rate of 1.5 percent.

In a quarterly monetary policymaking meeting held on June 16, the central bank decided to increase interest rates by 12.5 basis points, with the discount rate going up to 1.5 percent. It was the second consecutive quarter the bank had hiked interest rates after a 25-basis point rise in March.

The central bank has scheduled two additional quarterly policymaking meetings for Sept. 22 and Dec. 15.

Compared with the U.S. Federal Reserve's decision on June 15 to raise interest rates by 75 basis points, the local central bank's tightening was mild. The Fed has raised interest rates by 150 basis points so far this year, and will continue its aggressive move as the June U.S. CPI soared 9.1 percent from a year earlier.

Taiwan's central bank governor Yang Chin-long (楊金龍) has said that while the bank is gearing up to fight inflation, it also has to take into account local economic growth at a time when the pandemic has taken a toll on private consumption. Yang added that Taiwan's inflationary pressure appeared mild compared with that in the U.S.

In June, Taiwan's CPI rose 3.59 percent year-on-year, the highest level in nearly 14 years, but the Directorate General of Budget, Accounting and Statistics (DGBAS) expects the growth will be moderating for the rest of the year.

In the wake of growing inflationary pressure, Taiwan Ratings has decided to raise its forecast of Taiwan's CPI growth to 3.2 percent, from a 1.5 percent estimate it made at the end of last year, while the rating agency has also expected the local CPI will grow 2.6 percent in 2023, up from its previous forecast of 1 percent.

Meanwhile, the rating agency has left its forecast of Taiwan's gross domestic product (GDP) growth unchanged at 2.8 percent.

"This is less than half the economy's 6.6 percent growth rate in 2021. Nonetheless, it remains somewhat impressive, given the increasing uncertainties facing its key export sectors," Taiwan Ratings said in a statement on the Taiwan 2022 Mid-Year Credit Outlook report.

The agency said global demand for Taiwan's exports remained strong over the past few quarters, but overall outbound sales growth and capital expenditure in related industries have slowed, largely due to a relatively high comparison base a year earlier.

In addition, Taiwan Ratings said, a widely expected rebound in local consumer spending has stalled, and it will depend on how the COVID-19 pandemic and local inflation develop.

Commenting on downside risks brought by a weakening global economy, Taiwan Ratings' credit analyst Daniel Hsiao (蕭黎明) said that consumer electronics product suppliers are expected to feel most of the pinch resulting from falling global demand, but downside risks are expected to be limited in emerging technologies such as electric vehicles, 5G applications, artificial intelligence and servers.

The rating agency said corporations in Taiwan are now faced with uncertainties such as rising inflationary pressure and still growing energy and raw materials prices, as well as a supply chain disruption.

In addition, a rate hike cycle worldwide, geopolitical tensions, China's zero-COVID policy and renewed pandemic-related disruptions are expected to create headwinds to Taiwan's economy, it said.

According to the DGBAS forecast, Taiwan's GDP will grow 3.91 percent in 2022, with the CPI to rise by 2.67 percent.