Central bank warns of Middle East risks but upbeat on AI-driven growth

Taipei, March 21 (CNA) Taiwan's central bank has warned that the ongoing war in the Middle East posed a key risk to the local economy and that it was leaning toward "tightening" monetary policy even while keeping interest rates unchanged for the time being.

In an analysis of global economic trends released after deciding against a rate change at its latest quarterly policymaking meeting on Thursday, the central bank said the U.S. and Israel's war against Iran has become the top downside risk facing the global and domestic economy.

If the conflict persists and further disrupts traffic through the Strait of Hormuz, global energy prices will remain elevated and fuel inflationary pressures at home and abroad while weighing on Taiwan's economic growth, the bank said.

It also warned that fluctuations in international crude oil prices will likely influence major central banks' monetary policy, with any changes likely to affect global fund flows and stock and bond market movements.

At Thursday's meeting, the central bank decided to leave its key interest rates unchanged for the eighth consecutive quarter, but central bank Governor Yang Chin-long (楊金龍) said the bank had a "tightening bias."

He said the second quarter would be critical in assessing the real economic impact of the war.

Speaking with CNA, Cathay United Bank chief economist Lin Chi-chao (林啟超) said Yang's remarks indicated that the central bank had adopted a hawkish tone.

At present, Lin said, the situation has yet to reach a level warranting action by the central bank.

He also noted that the central bank had raised its forecast for Taiwan's economic growth this year to 7.28 percent, up from its previous estimate of 3.67 percent made in December, citing strong exports and private investment.

If the conflict continued into May and spread to a wider area, however, the central bank could raise interest rates to address mounting inflationary pressures, Lin argued.

Meanwhile, the central bank also decided Thursday to slightly ease selective credit controls by raising the maximum amount home buyers could borrow for a second home up to 60 percent of the home's value, from the previous 50 percent.

Lin said the move was likely intended to give home buyers more flexibility if geopolitical tensions were to worsen, as market volatility could tighten credit conditions and weigh on the housing market.

Despite the geopolitical uncertainty, the central bank said strong global demand for AI applications remains a positive factor for Taiwan's economy.

With major international cloud service providers boosting capital spending amid the AI boom, Taiwan's exports and private investment are expected to grow further, the bank said.

The central bank noted, however, that whether these cloud service providers can generate profits from their heavy investments remains an open question.