Taiwan lifts GDP, inflation outlook as rate hike draws near

[TAIPEI] Taiwan raised its forecasts for economic growth and inflation for this year, giving policy makers in Taipei reason to join many of their counterparts around the world in lifting borrowing costs.

Gross domestic product will expand 4.42 per cent in 2022, up from an earlier forecast of 4.15 per cent, the government said in a report on Thursday (Feb 24). Inflation is set to reach 1.93 per cent compared with 1.61 per cent previously.

Economists in a Bloomberg survey predict full-year growth of 3.4 per cent for this year and inflation of 1.7 per cent.

A robust growth outlook and stubbornly high inflation coupled with a stable currency could prompt the monetary authority to raise rates for the first time since 2011, possibly as soon as March.

Meanwhile, ongoing widespread shortages in materials for manufacturers and tensions in Ukraine are only likely to exacerbate prices further, according to Peng Su-ling, head of economic forecasting at the Taipei-based Chung-Hua Institution for Economic Research.

"Whether or not prices ease off or continue to rise depends on both internal and external factors, including supply-chain issues," she said in a telephone interview on Wednesday. "The external factors are very important. If the international community imposes sanctions on Russia, the rise in fuel prices will make inflation more severe."

Inflation will likely peak at over 2 per cent in the first quarter before slowing through the rest of the year, Chu Tzer-ming, head of the Cabinet's statistics department, said at a briefing following the release of Thursday's data. The core consumer price index rose 2.42 per cent in January from a year earlier, the highest since 2009.

Despite a range of extraordinary government measures in an effort to keep prices in check, CPI rose 2.8 per cent in January, the sixth straight month of 2 per cent-plus increases, according to the cabinet's statistics bureau. Core consumer prices, measured by a basket of goods and services excluding vegetables, fruit and energy costs, increased 2.4 per cent, the fastest pace since January 2009.

The government has restricted fuel and gas prices for residential users as well as temporarily scrapping sales and import duties on key staples such as corn, wheat and soy beans.

Despite the outlook for higher prices, private consumption is likely to surge by the most in 18 years to a record high NT$10.3 trillion (S$497 billion) in 2022, fuelled by strong salary growth and large annual bonuses after a stellar year for corporate revenues last year, the statistics bureau said in its statement.

High prices have prompted economists and traders to increase their bets that Taiwan's policy makers will follow the lead of the Federal Reserve and other major central banks in raising rates this year. Borrowing costs have been at a record-low 1.125 per cent since early 2020.

But a possible rate hike may not primarily be driven by the Fed's actions, Stephen Chiu, an FX and rates strategist at Bloomberg Intelligence, wrote last week. Instead, it may rather be aimed at normalising rates back to pre-pandemic levels and thus preserving room for a future crisis, he wrote.

And while the Taiwan dollar remains a primary concern for the central bank after it rose to its strongest level against the US dollar since 1997 in January, the monetary authority may embrace the increase as a useful tool in its battle against consumer prices, he said.

"Taiwan views its currency as anti-inflationary, meaning it may rely on a stronger Taiwan dollar to taper imported inflation instead of hiking rates, so a continued Taiwan dollar rise may actually restrain further rate hikes," Chiu said. BLOOMBERG