Taiwan set for back-to-back rate hikes for first time since 2011

TAIWAN is poised to implement back-to-back interest-rate increases for the first time since 2011 as the central bank seeks to tame consumer prices expected to rise to their highest in more than a decade.

After springing a surprise rate hike of 25 basis points last quarter, policymakers are likely to increase the policy rate by the same margin to 1.625 per cent on Thursday (Jun 16), according to 20 of the 25 economists surveyed by Bloomberg. The rest see a hike of 12.5 basis points.

The central bank will likely reach 2 per cent in the first quarter next year, with a move of 12.5 basis points in each of its subsequent meetings, according to economists.

Taiwan's policymakers are joining their global peers in the rush to tighten policy faster than previously signalled amid mounting criticism central bankers were too slow to identify the risk of persistent high inflation. If the Taipei-based monetary authority raise rates by 75 basis points this calendar year as economists expect, it would be the biggest annual jump in borrowing costs since the 2004-2008 cycle.

"While global semiconductor demand remains supportive, it is increasingly obvious that Taiwan will face a dilemma of decelerating economic growth and higher inflation," said Gary Ng, senior economist at Natixis Asia in Hong Kong. China's lockdowns and the domestic Covid outbreaks have posed challenges for Taiwan to extend its growth trajectory in the short run, he said.

Economists see high prices as an increasingly severe problem Taiwan will have to contend with through the third quarter of 2023. Inflation, which reached 3.39 per cent in May, is forecast to average 3 per cent this year, according to Bloomberg's survey, well above the central bank's traditional 2 per cent comfort zone, before easing to 1.75 per cent in 2023.

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In addition to inflation, Taiwan's export-driven economy is facing multiple challenges to maintain last year's strong growth. Russia's invasion of Ukraine and repeated Chinese Covid lockdowns has caused chaos to global supply chains at a time of sustained overseas demand for Taiwanese-made semiconductors. The first serious Covid outbreak at home has also dented sectors reliant on consumer spending.

Economists surveyed by Bloomberg cut their forecasts for Taiwan growth slightly for 2022 to 3.45 per cent from 3.5 per cent.

Citigroup economist Adrienne Lui expects policymakers to limit Thursday's rate hike to 0.125 per cent as it tries to reduce the impact on smaller businesses.

"We believe the central bank is likely to factor into its policy rate calculus the impacts on SMEs who are less able to mitigate both operating cost pressures and Covid stresses, on the back of the scheduled June expiration of the NT$400 billion (S$18.8 billion) SME loan guarantee programme and no other fiscal stimulus measures announced for this Covid round thus far," Lui wrote in a note last week.

Fixed income and real estate are other sectors that will also be playing close attention to the central bank's actions this week. Traders will be looking to see if the authority raises its open-market rates by the same margin as the benchmark rate, given the direct impact it has on financial markets. Property developers and buyers meanwhile will be paying close attention to any central bank moves to further tighten its selective credit controls aimed at reining in housing prices. BLOOMBERG