Taiwan Central Bank Hikes Rates in Surprise Move -- Update

By Sherry Qin and Fabiana Negrin Ochoa

Taiwan's central bank surprised markets by raising its key interest rates on Thursday to guard against risks to inflation, moving out of lockstep with many regional counterparts that continue to hold policy settings steady.

While saying that it expects inflation to gradually cool over the year, the Central Bank of the Republic of China (Taiwan) said higher rates will help keep prices stable in the face of potential headwinds. It also projects that economic growth will pick up this year, further backing its case for higher rates.

The CBC raised its benchmark discount rate by 12.5 basis paints to 2.000%, defying the expectations of analysts polled by The Wall Street Journal, who had expected it to stay on hold. The bank lifted its secured loan rate to 2.375% and unsecured loan rate to 4.250%.

That makes it the first in the Southeast Asia region to tighten policy settings after banks went on a blistering run of interest-rate hikes in the fallout from the pandemic. Indonesia's central bank opted to stand pat earlier this week, as did Malaysia, the Philippines and Thailand at their most recent meetings. Taiwan had held rates steady since June last year.

CBC forecasts that economic growth will rise to 3.22% this year from 1.31% in 2023, fueled by rebounding global demand for the island's high-tech products and strong consumption at home.

Economists had widely anticipated CBC to extend its pause to a fourth meeting amid signs of gradually easing but still sticky inflation. Weakness in the Taiwan dollar was another factor, particularly given the question marks around the timing of rate cuts by the Federal Reserve. Still, analysts had noted reason to expect a hawkish tilt as well.

DBS economist Tieying Ma had expected the bank to communicate a hawkish stance, while Deutsche Bank APAC Chief Economist Juliana Lee had seen scope for a hawkish hold. According to the CBC's most recent monetary policy minutes, a few board directors had remained open to resuming rate hikes if inflation fails to trend lower toward its inflation forecast, Lee told Dow Jones Newswires.

"This surprising hike is not entirely surprising," said Raymond Yueng, chief economist for Greater China at ANZ. "Although our base care was a hold, we had warned that some MPC members are concerned about inflation risk. Now that the CBC showed they have acted, they will likely turn back to wait-and-see."

The CBC cited the proposed increase in domestic electricity prices in April as a key concern for inflation and raised its forecasts for both headline and core inflation for the year.

These inflation concerns look overdone to Capital Economics.

While the electricity price hikes will add to inflation, other factors will likely mitigate that, said Shivaan Tandon, emerging Asia economist at the research firm. The jobs market has cooled even as growth has accelerated, and spillovers from strong external demand to domestic inflation have been limited.

"While economic growth in Taiwan has been very strong over the past three quarters, the booming economy has not led to a sharp rise in inflation," he said. "We expect this to be a case of one and done."

Write to Sherry Qin at [e-mail] and Fabiana Negrin Ochoa at [e-mail]

(END) Dow Jones Newswires

03-21-24 0637ET