Central bank under pressure to raise rates at upcoming meeting: Economists

Taipei, Sept. 12 (CNA) With domestic inflation topping the 2 percent alert level for a fourth consecutive month in August and several major central banks around the world raising their key interest rates, Taiwan's central bank is facing growing pressure to raise rates at its quarterly policymaking meeting scheduled for Thursday, economists said.

At its March meeting, the central bank left interest rates unchanged for the ninth consecutive quarter with the discount rate at 2.0 percent.

Central Bank Governor Yang Chin-long (楊金龍) said at a post-meeting news conference that the bank maintained a somewhat hawkish stance, with two board directors voicing support for a rate hike at the meeting.

Inflation concerns

Cathay United Bank chief economist Lin Chi-chao (林啟超) told CNA in an interview earlier this week that the central bank had forecast in June that Taiwan's consumer price index (CPI) would rise by less than 2 percent in 2026.

However, the situation has since changed as international crude oil prices have risen amid escalating tensions in the Middle East, Lin said.

"Inflationary pressure has been on the rise," Lin said, citing an August forecast by the Directorate General of Budget, Accounting and Statistics (DGBAS) that Taiwan's CPI would increase 2.07 percent in 2026.

In addition, Lin said the central bank needs to take into account the monetary policy decisions of other major central banks when deciding whether to adjust interest rates.

Other central banks' decisions

The Bank of Korea hiked its benchmark interest rates from 2.50 percent to 3.00 percent with two consecutive increases in July and August.

The European Central Bank raised its key interest rates by 25 basis points on Thursday, marking its second rate hike this year, while the possibility of the Bank of Japan raising rates next week is high, Lin said.

More importantly, the U.S. Federal Reserve could raise rates next week, with the odds rising to nearly 90 percent after August CPI data showed persistent inflationary pressure.

"Whether considering domestic conditions or the international situation, the interest rate hike checklist has been fully checked," Lin said.

With Taiwan's economic growth forecast to top 11 percent in 2026, the local economy is expected to be able to absorb the impact of a rate hike, he added.

Gordon Sun (孫明德), director of the Taiwan Institute of Economic Research's Economic Forecasting Center, said he also expects the Fed to raise rates next week, a day before the central bank's meeting, which could serve as an indication for Taiwan's central bank to follow suit.

Sun said a wider interest rate spread between Taiwan and the United States would be an important factor for the central bank to consider if Taiwan's rates remain unchanged.

Tight liquidity in local market boosts rates

Sun said a central bank rate hike would not be primarily aimed at curbing inflation, but rather at addressing tightening liquidity in the local market.

Fund demand has increased as the current AI boom has prompted companies to step up investment, while the high-flying stock market has also boosted demand for funds, further tightening liquidity, Sun said.

Tight liquidity has pushed up market interest rates, so the central bank needs to respond by raising its key interest rates, he said.

However, Sun said he has some concerns about a rate hike. Taiwan's strong economic growth is largely driven by AI development, while the traditional economy has lagged behind, meaning higher interest rates could place a heavier financial burden on traditional industries, he said.