Central bank directors remain concerned over inflation, hint no rate cuts

Taipei, Nov. 2 (CNA) Some directors of the Central Bank of the Republic of China (Taiwan) expressed their concerns over inflation, suggesting there is no rush for the bank to reduce interest rates, although several major central banks in the world have kicked off a rate cut cycle, according to the minutes of the September quarterly policymaking meeting released by the central bank.

A director who attended the quarterly meeting held on Sept. 19 said that despite the overall consumer price index (CPI) growth showing signs of moderating, rents continued to increase and dining out expenses continued to grow, making it inappropriate for the central bank to cut interest rates too early.

The comments came as the local central bank decided to leave its key interest rates unchanged in the September meeting despite a 25-basis point rate cut by the U.S. Federal Reserve a day earlier, the first rate reduction by the U.S. central bank in four years. The Fed is expected to reduce rates again later in November.

The Sept. 19 decision represents the second consecutive quarter in which the local central bank has resolved to maintain its key interest rates.

After the decision, the discount rate remains at 2 percent -- which is still the highest in 15 years -- with the rate on accommodations with collateral at 2.375 percent and the rate on accommodations without collateral at 4.250 percent.

Citing the year-on-year rent growth of 2.38 percent in the first eight months of this year, the director said in the minutes that while the central bank has forecast the CPI growth will dip below the 2 percent alert in 2025, with home prices staying high, rents could keep rising, which will add upward pressure to inflation.

According to the Directorate General of Budget, Accounting and Statistics (DGBAS), the rent growth contributed about 0.36 percentage points to the CPI growth in the eight-month period, when the overall index grew 2.32 percent.

Another director adopted a similar stance, saying as long as rents continued to rise, Taiwan still faced inflationary risks so that there was no need for the central bank to follow its counterparts in the world to relax the monetary policy at the moment.

A third director said Taiwan's interest rates still lagged behind those in other countries and the room for a local rate cut cycle appeared limited.

In the first eight months, dining out expenses rose 3.21 percent from a year earlier, representing a 0.34 percentage points in the CPI rise, according to the DGBAS. Market analysts said when landlords raise rents, food vendors may mark up product prices to boost dining out costs, which causes inflation to rise.

In the September meeting, the central bank forecast Taiwan's CPI will grow 1.89 percent in 2025 with the core CPI, which excludes fruit, vegetables and energy, expected to rise 1.79 percent, compared with an anticipated 2.16 percent increase in the 2024 CPI and a forecast 1.94 percent rise in the 2024 core CPI.

While the central bank maintained interest rates in the latest policymaking meeting, it raised the required reserve ratio -- the proportion of deposits regulators require banks to hold in reserve and not loan -- by 25 basis points to rein in highflying house prices.

In addition, the central bank introduced a seventh round of selective credit controls on the home market to intensify its efforts to curb speculation.

Among the measures in the latest selective credit controls, the central bank has lowered the loan-to-value ratio -- the percentage of the value of the house that can be carried in a mortgage -- for individual buyers for their second-home mortgages from 60 percent to 50 percent, applied to the entire country.

This nationwide measure aimed to reduce property speculation by forcing buyers to put up more of their own capital to purchase property. Before the measure, only Taipei, New Taipei, Taoyuan, Taichung, Tainan and Kaohsiung cities as well as Hsinchu City and County had such controls.

More importantly, no grace period is allowed for individual buyers who already own a home but will buy their first one, which means they will be required to pay the interest and principal at the same time. Previously, such house buyers were allowed to only pay interest for a period of time agreed by banks.

According to the central bank, those who had already owned one home and still wanted to buy a second one accounted for almost 20 percent of the total home buyers, and such a grace period had allowed them to speculate in the property market.

Agreeing with the central bank, a director said in the meeting that many investors had leveraged such a grace period to gamble in the property market for profit, by using funds provided by banks instead of their own money.

With the grace period in place, the director said, once home prices come under pressure to have a hard landing, the stability of the financial sector could be damaged, adding that the central bank should tighten its grip on mortgages extended by banks.

Another director said a move by the central bank to raise the required reserve ratio is expected to prompt banks to become more cautious about their lending, which could keep large funds from entering the property market.

According to the central bank, all of its directors attending the September meeting voted for the latest round of credit controls and an increase in the required reserve ratio.

On the back of the government's latest mortgage program to help young people buy homes by providing subsidies on interest payments, mortgages extended by Taiwanese banks accounted for 37.5 percent of their total lending at the end of August, which has come closer to a historic level of 37.9 percent in 2009.