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Central bank expected to leave interest rates unchanged in March: experts

03/02/2024 05:02 PM
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The Central Bank of the Republic of China in Taipei. CNA file photo
The Central Bank of the Republic of China in Taipei. CNA file photo

Taipei, March 2 (CNA) The Central Bank of the Republic of China (Taiwan) is expected to leave its key interest rates unchanged at a quarterly policymaking meeting scheduled for March 21 due to a likely electricity tariff hike, which could push up inflationary pressure, according to experts.

While the rate hike cycle of the U.S. Federal Reserve has come to an end and the market widely anticipates the Fed will start cutting rates later this year, the local central bank is expected to maintain its tightening monetary policy for the moment, they added.

At the last policymaking meeting held in December, the central bank left interest rates unchanged, marking the third consecutive quarter the local central bank has maintained its monetary policy with the discount rate staying at 1.875 percent.

Since the central bank kicked off its rate hike cycle in 2022 to combat inflation, the discount rate has risen to the highest in eight years, reaching 75 basis points.

Chang Chien-yi (張建一), president of the Taiwan Institute of Economic Research (TIER), who is also a central bank board member, said if electricity rates are hiked as the market expects, inflationary pressure is forecast to grow, accordingly.

The Ministry of Economic Affairs (MOEA) is expected to convene a power rate evaluation meeting in late March to discuss electricity rates, at a time when state-owned Taiwan Power Co. (Taipower) continues to incur heavy losses. The MOEA has strongly hinted power tariffs will be raised starting from April to make up for the losses suffered by Taipower.

According to Taipower, the company incurred NT$382.6 billion (US$12.11 billion) in accumulated losses, with a loss of NT$198.5 billion recorded in 2023 alone.

Once power rates increase, the business sector is expected to see operating costs rise, with restaurants and smaller food stalls likely to raise prices, boosting the expense of dining out and eventually pushing up inflation, Chang said.

"I do not rule out the possibility that local inflation will hit 2 percent this year," Chang added.

On Thursday, the Directorate General of Budget, Accounting and Statistics (DGBAS) raised its forecast for Taiwan's consumer price index (CPI) growth by 0.21 percentage points from its previous estimate made in November to 1.85 percent, which is still below the 2 percent alert set by the central bank.

According to the DGBAS, the upward revision in inflation came after the agency took into account the stubborn nature of service costs such as dining out expenses and rent, which tend not to fall back after spiking.

In January, Taiwan's CPI rose 1.79 percent from a year earlier, the slowest growth since June 2023, when the index increased 1.75 percent year-on-year, largely due to a relatively high comparison base over the same period of last year, when the Lunar New Year holiday fell in the second half of the month.

Dining out expenses rose 4.0 percent from a year earlier in January, while the rent index grew 2.14 percent to hit a new high of 105.19, marking the sixth consecutive time monthly growth has topped 2 percent.

Expressing concerns over inflation, Joseph N.C. Huang (黃男州), chairman of E. Sun Financial Holding Co., said with a 4 percent wage hike for civil servants and an improvement in enterprises' profitability, there is upward pressure on local consumer prices.

Echoing Chang and Huang, Wu Meng-tao (吳孟道), an economist with TIER, said the central bank is likely to raise its forecast of Taiwan's CPI growth for 2024 at the March meeting bringing it closer to 2 percent or even above the alert level, an increase from the previous forecast of 1.89 percent made in December.

"There is no rush for the central bank to adjust its monetary policy" because it needs more data to assess local inflation, Wu said.

As Taiwan's economy is poised to recover this year from last year with gross domestic product (GDP) growth expected to top 3 percent in 2024, compared with 1.31 percent in 2023, the central bank has no reason to cut interest rates right now, he added.

The DGBAS has raised Taiwan's GDP growth forecast by 0.08 percentage points to 3.43 percent for 2024.

Although the local central bank raised interest rates for five quarters in a row before leaving them unchanged for three quarters, Taiwan's interest rates remain relatively low compared with those in other economies, Wu said, adding that lingering concerns over inflation are expected to make the possibility of any imminent rate cut cycle less likely.

Compared with Taiwan's discount rate of 1.875 percent, the Fed raised interest rates to a range of 5.25 percent and 5.50 percent after a recent aggressive rate hike cycle.

The minutes of the last quarterly policymaking meeting held by Taiwan's central bank in December show that a majority of the bank's board members remain wary of local inflation, saying it is possible the bank could even tighten its monetary policy again.

Taiwan's CPI growth hit 2.95 percent in 2022 and 2.49 percent in 2023.

(By Pan Tzu-yu and Frances Huang)

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