At a time when the world’s major central banks have tightened their monetary policies to take on growing inflationary pressure, Taiwan’s central bank will come up with two more interest rate hikes after Thursday’s increase, UBS, a Swiss banking group, has forecast.
In a statement released on Friday, UBS North Asia economist William Deng (???) said the central bank is expected to announce one rate hike in June and another in the meeting that will come in September.
In a surprise move, the central bank announced it has decided to raise its key interest rates by 0.25 percentage points in its quarterly policymaking meeting on Thursday after the U.S. Federal Reserve made a similar move on Wednesday. The Fed even hinted an additional six rate hikes will come later this year.
The market had previously expected Taiwan’s central bank would leave its key interest rates unchanged for the eighth consecutive quarter in March or just raise increase rates by 0.125 percentage points as the inflation problem faced by Taiwan was not as pressing as the problem the U.S. had to tackle.
After the rate hike, the central bank’s discount rate rose to 1.375 percent from the historic low of 1.125 percent with the rate on accommodations with collateral growing to 1.75 percent, and the rate on accommodations without collateral increasing to 3.625 percent. It is the first rate hike by the central bank in more than 10 years.
In February, Taiwan’s consumer price index grew 2.36 percent to top the 2 percent alert level in the wake of soaring crude prices and raw material prices, while the U.S. saw its CPI soar 7.9 percent, the highest increase in more than 40 years.
Related: Inflation continues untamed in Taiwan in February (March 8)
Deng said UBS was among the few which had expected the central bank to kick off a rate hike cycle in March, adding the central bank will take its policy rate back to the pre-COVID level within the year.
Deng said while a 25-basis point hike may seem usual for other monetary authorities, the scale of the March rate hike is bigger than usual for Taiwan because the local central bank only took a 12.5 basis point step for all rate hikes since 2007.
Deng said the central bank’s move surprised the market but came closer to UBS’s expectations.
In addition to a move to raise the discount rate, the central bank has also increased the interest rates for negotiable certificate of deposit (NCD), which tracks closer to short term market rates, 25 basis points for all durations.
Deng said the central bank is expected to raise its key interest rates by 0.125 percentage points in the June 16 meeting and an additional 0.125 percentage points in the Sept. 22 meeting.
2022 GDP outlook
The economist said while UBS has lowered its forecast of Taiwan’s gross domestic product (GDP) growth to 2.8 percent for 2022 in the wake of a lower global increase, as the local job market is expected to remain stable, the economy is estimated to grow more than 3 percent in the second and third quarter of this year.
On Thursday, the central bank raised Taiwan’s GDP growth to 4.05 percent from the earlier estimate of 4.03 percent made in December 2021.
The central bank said the local consumer price index (CPI) has been above 2 percent, the alert threshold, for several months, and that is expected to continue into the third quarter of this year.
However, the central bank expects the local CPI to fall below 2 percent in the fourth quarter, while it has raised its growth forecasts for domestic CPI and core CPI, which excludes fruit, vegetables and energy, from 1.59 percent and 1.45 percent to 2.37 percent and 1.93 percent, respectively.
Source: Focus Taiwan News Channel