Taiwan Unexpectedly Raises Rate in Signal of Asia’s Confidence
By Chinmei Sung and Yu-huay Sun
June 25 (Bloomberg) -- Taiwan’s central bank unexpectedly raised its benchmark interest rate for the first time since 2008, joining Asian policy makers from China to Malaysia in signaling confidence the global recovery will withstand Europe’s debt woes.
Governor Perng Fai-nan and his board yesterday increased the discount rate on 10-day loans to banks to 1.375 percent from a record-low 1.25 percent, confounding the forecasts of all 13 economists surveyed by Bloomberg News, who expected no change.
The decision came five days after China, Taiwan’s biggest trading partner, pledged to end a currency peg to the dollar, and after South Korean officials said risks to the economy are now balanced between inflation and threats to growth from Europe’s crisis. The policy shifts also reflect Asia’s role in leading the world rebound, and rising asset prices that could destabilize markets without monetary tightening to avert bubbles.
Taiwan’s move “suggests that we can expect some other Asian countries to raise rates in the third quarter,” said David Cohen, an economist at Action Economics in Singapore. Nations including China, South Korea, Thailand and the Philippines could move in the second half of this year, he said.
Taiwan’s gross domestic product rose 13.3 percent in the first quarter from a year earlier, the fastest pace since 1978.
Stock-index futures fell after yesterday’s decision. MSCI Taiwan Index futures declined 0.6 percent as of 5:28 p.m. local time. Taiwan’s dollar closed 0.1 percent lower against its U.S. counterpart at NT$32.216 at 4 p.m., before the rate decision.
Certificates of Deposit
The central bank will continue to sell one-year certificates of deposit to help drain cash from the financial system, Perng said at a press briefing in Taipei yesterday. The bank resumed sales after its last meeting in March.
Mirroring counterparts around Asia, the central bank expressed concern about rising property prices. Lenders should focus on borrowers’ ability to repay home loans, it said, noting sharp price gains within metropolitan Taipei. It told lenders to cap home loans in that area at 70 percent of property values.
The Central Bank of the Republic of China (Taiwan) held the benchmark rate at a record low from March 2009 after cutting it at seven consecutive meetings to boost investment and consumption. Yesterday’s move followed others elsewhere.
Malaysia’s central bank raised interest rates for the second time this year last month and New Zealand’s central bank two weeks ago boosted borrowing costs for the first time in three years. China’s decision to scrap the yuan’s peg ended a crisis policy in place for almost two years.
Inflation Pressures
Taiwan’s central bank said the move reflected the global and domestic recoveries, the island’s falling jobless rate and significant export gains.
Emerging economies face inflation pressures, Perng told reporters, adding that he “hopes” Taiwan’s consumer prices will increase by less than 1.4 percent in the second half of the year. In May, the gain was 0.74 percent. The central bank aims for real interest rates to be positive, the governor said.
South Korea will “normalize” its accommodative policies and take pre-emptive steps against inflation as the economy is set to grow faster than previously forecast amid the global rebound, the Finance Ministry said yesterday. The Bank of Korea’s benchmark rate is currently at a record-low 2 percent.
“Policy is set to be normalized across the region in coming months,” said Brian Jackson, a Hong Kong-based emerging markets strategist at Royal Bank of Canada. Taiwan’s increase “suggests that many policy makers in the region are looking beyond a possible short-term dip in growth and are taking a proactive approach.”
Economic Forecasts
Taiwan last month raised its 2010 GDP growth projection to 6.14 percent from 4.72 percent, and its annual inflation forecast to 1.4 percent from 1.27 percent. A government report this week showed the jobless rate fell to a 17-month low.
Taiwan Semiconductor Manufacturing Co., the island’s biggest company by market value, reported record monthly sales of NT$33.8 billion ($1.1 billion) in May. Chairman and Chief Executive Officer Morris Chang last week raised his forecast on the growth of global chip-industry sales to “nearly 30 percent” this year from an April estimate of 22 percent.
China’s more flexible yuan may boost demand in that nation for imports from Taiwan and closer trade ties may also be a boon, with Taiwanese President Ma Ying-jeou aiming to sign an accord this month. China and Taiwan have been ruled separately since Chinese Nationalist Party troops fled to the island after losing a civil war to Mao Zedong’s Communist forces in 1949.
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