Taiwan central bank raises benchmark rate again to curb inflation

TAIWAN’S central bank raised its policy rate on Thursday (Jun 16) for the second time this year and in line with expectations, reflecting concerns about quickening inflation, and also trimmed the trade-reliant island’s growth outlook for 2022.

The decision follows the US Federal Reserve’s largest rate increase in more than a quarter of a century on Wednesday, which added to worries of a possible recession.

Taiwan’s central bank raised the benchmark discount rate by 12.5 basis points (bps) to 1.5 per cent.

All 19 economists in a Reuters poll had expected the central bank to lift the rate, with 10 predicting a rise to 1.5 per cent and the other 9 expecting it to reach 1.625 per cent.

As an additional tool to help curb inflation, the bank also raised by 25 bps the various rates it has for banks’ reserve requirement ratios — the first time since 2008 it has made such a move, estimating it would “lock in” around NT$120 billion (S$5.6 billion) in banks.

Taiwan’s central bank has repeatedly said that it will tighten monetary policy this year, following other major economies, and that it sees inflation as a key criteria for rate moves.

Governor Yang Chin-long told reporters that weak domestic consumption in the first quarter due to a now waning Covid-19 outbreak was a major reason why the bank raised the rate “just 12.5 bps”.

“Is it a brave decision this time? It’s a complicated and difficult decision because we have the problem of inflation,” he said, adding policymakers will hold off-cycle board meetings as needed this year to address the challenge.

Capital Economics said in a note it saw further rate hikes ahead, but not aggressive ones, pointing to Taiwan’s inflation being milder than much of the rest of the world.

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The central bank said it expects the consumer price index (CPI) to rise 2.83 per cent in 2022, revising up the outlook from 2.37 per cent predicted in March.

Taiwan’s consumer price index was 3.39 per cent higher in May than a year earlier. That inflation rate was the highest since August 2012, and exceeded the central bank’s 2 per cent target for the 10th month in a row.

Price pressures are still much more moderate than in the United States and Europe, however, and Taiwan’s export-reliant economy has been supported by a global shortage of semiconductors that has filled Taiwanese chip-makers’ order books.

The central bank also cut its 2022 estimate for gross domestic product (GDP) growth to 3.75 per cent from 4.05 per cent seen in March.

Taiwan’s export orders — a bellwether for global technology demand — fell for the first time in 25 months in April, taking a larger-than-expected hit from Covid lockdowns in China and broader global supply chain disruptions.

Kevin Wang, an economist at Taishin Securities Investment Advisory, said the relatively mild rate hike showed the central bank was trying to prop up economic growth. “There’s no guarantee any more of 4 per cent growth this year.” REUTERS