Taiwan May Raise Interest Rate to 7-Year High to Cool Inflation
Taiwan's central bank will probably raise the benchmark interest rate to the highest in more than seven years to damp inflation.
Governor Perng Fai-nan will boost the discount rate on 10- day loans to banks by 12.5 basis points to 3.625 percent, said 14 of 16 economists surveyed by Bloomberg News. Two see a 25- basis-points increase. The Central Bank of the Republic of China (Taiwan)'s decision is due after 5 p.m. in Taipei today.
A 16th straight quarterly rate increase may fuel demand for Taiwan's dollar, Asia's best performer this year, helping mitigate the effect from the soaring cost of global commodities. Central banks in India, Indonesia and the Philippines all lifted borrowing costs this month as oil, rice and soybean prices climb to records and stoke inflation across the region.
“We see further upward pressure on headline inflation that could be too much for the central bank's comfort,'' said Tony Phoo, an economist at Standard Chartered Bank in Taipei. “We now expect the CBC to hike 12.5 basis points to 3.625 percent in June and another 12.5 basis-point rise in September.''
Taiwan's dollar has risen 6.7 percent this year as the island's higher yields attract foreign investment. A stronger currency reduces the cost of imported goods.
Taiwan's oil refiner CPC Corp. increased fuel prices at the end of May. China Steel Corp. said it will boost prices in the third quarter to help recoup higher raw-material costs.
Wholesale prices climbed 7.72 percent in May from a year earlier. Consumer prices advanced 3.71 percent last month.
Asian Inflation
Taiwan's statistics bureau in May raised its 2008 consumer- price inflation forecast to 3.29 percent, which would be the highest annual rate in 13 years.
In China, inflation quickened to fastest pace in 12 years, Japan's consumer prices are near a decade high and India's wholesale inflation accelerated to a 13-year high absolutely free credit report.
Asia's export-dependent economies also faces risks from a faltering U.S. economy.
Overseas shipments, equivalent to more than 50 percent of gross domestic product, have been a key driver of Taiwan's economic expansion. Asia's fifth-largest economy grew 6.06 percent in the first quarter from a year earlier.
Governor Perng said in March that it's “a very difficult job'' to reach a balance between containing inflation and sustaining economic growth.
Still, closer ties with China, the world's fastest growing major economy, may shore up Taiwan's expansion amid a global slowdown.
Taiwan's government in May forecast exports will expand 12.3 percent in 2008, accelerating from 10.1 percent last year. China and the U.S. are the island's two biggest markets.
China Ties
President Ma Ying-jeou, who took office on May 20, pledged to rapidly open ties with China and improve the economy. China and Taiwan signed an agreement on June 13 to begin direct weekend passenger flights and tour-group visits from July, after completing their first official talks since 1999.
Taiwan and China have been ruled separately since 1949 when Mao Zedong's communists took control of the mainland. China considers Taiwan part of its territory and has threatened to invade if the island formally declares independence.
Direct flights and cross-strait tourism may add about 0.6- to-0.8 percentage points to Taiwan's economic growth, Goldman Sachs Group Inc. economist Enoch Fung estimates.
“The implementation of these policies would support a recovery in sentiment and domestic demand, and should help Taiwan offset the negative external shock from slower U.S. demand and higher energy prices,'' Fung said in a June 13 report.
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