COST OF LIVING/Central bank to adopt flexible approach to 2% inflation target

Taipei, June 19 (CNA) The Central Bank of the Republic of China (Taiwan) has said that going forward the bank will view its alert of 2 percent for consumer price index (CPI) growth in a more flexible manner when adjusting monetary policy.

In a report released after the latest quarterly policymaking meeting held on June 13, the central bank said Taiwan is a small-sized economy with inflation subject to external factors, indicating the 2 percent alert is not a rigid target for the bank.

At the policymaking meeting, the central bank decided to leave its key interest rates unchanged, although the local CPI for May rose 2.24 percent from a year earlier, higher than the 2 percent central bank target. In the first five months of this year, the CPI grew 2.24 percent, also topping the 2 percent target.

Despite the decision to maintain its monetary policy, the local discount rate remains at 2 percent but is still at a 15 year high, with the rate on accommodations with collateral at 2.375 percent and the rate on accommodations without collateral at 4.250 percent, after a surprise rate hike of 12.5 basis points at the bank's March meeting.

While several major central banks in the world, including the U.S. Federal Reserve and the European Central Bank (ECB), closely follow the 2 percent inflation alert, the local central bank said the impact of external factors on Taiwan's inflation has make it increasingly difficult for the bank to pursue the 2 percent goal.

The effects of external factors were more apparent on Taiwan's inflation after the outbreak of the COVID-19 pandemic, which boosted consumer prices due to more expensive imported goods with global supply chains interrupted, the central bank said.

The supply side has played an increasingly important role in Taiwan's CPI growth, the central bank added.

The central bank said some experts in Taiwan have been calling for the inflation target to be raised from the current 2 percent, while others have argued it is not a good idea for the bank to change the target before inflation moderates to 2 percent.

Amid divided opinions on the inflation target, the central bank said it will take a flexible view of CPI growth for the moment, while discussing the possibility of fine tuning its monetary policy in the face of the supply side problems faced by Taiwan's economy.

At the June meeting, the central bank decided to lower its estimate for Taiwan's consumer price index (CPI) growth for 2024 from 2.16 percent slightly to 2.12 percent, saying inflation showed signs of slowing.

The central bank also cut its growth forecast for core CPI, which excludes vegetables, fruit and energy, from 2.03 percent to 2.00 percent.

The Directorate General of Budget, Accounting and Statistics (DGBAS) has forecast Taiwan's CPI will grow 2.07 percent in 2024.