Taiwan set for modest rate hike as growth slows

Published Thu, Sep 22, 2022 · 08:34 AM

TAIWAN’S central bank is likely to increase its benchmark interest rate by a modest amount on Thursday (Sep 22), the third hike this year, as it tries to battle inflation without further weighing down its slowing economy.

The central bank is expected to raise its policy rate by 12.5 basis points to 1.625 per cent on Thursday, according to 21 out of 24 economists surveyed by Bloomberg, refraining from a more aggressive 25 basis point hike. The rate was raised by a smaller-than-expected 12.5 basis points in June and by 25 basis points in March.

The central bank’s decision will come hours after the US Federal Reserve’s move to hike interest rates by 75 basis points, the fifth increase this year, to tame rampant inflation. Taiwan’s policymakers have been able to be more flexible in their rate hikes, with inflation peaking in the second quarter amid a slowdown in the economy.

Taiwanese officials have sought to balance tempering inflation without hurting its economy, which has been weighed down by sluggish demand from China, the impact of Covid restrictions on supply chains, and other global headwinds. The government has already cut its 2022 growth forecast twice this year to 3.76 per cent.

“Taiwan’s economic slowdown is very apparent, with export growth only in the single digits and manufacturing PMI shrinking,” said Ma Tieying, an economist at DBS Group Holdings. “The risk of Taiwan’s economic downturn is very high, so from this point of view, increasing by 12.5 basis points is a compromise option and the best option.”

Economists surveyed by Bloomberg have also revised down Taiwan’s GDP to 3.2 per cent for this year. Those polled also expect that Taiwan will raise interest rates again in the fourth quarter to 1.75 per cent.

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Export orders from the island have started to slow, gaining 2 per cent in August from a year earlier, with orders from mainland China and Hong Kong falling more than 25 per cent. Manufacturing is also coming under pressure, with the purchasing managers index dropping in August to 42.7 - its lowest reading since May 2020.

Higher interest rates may also help bolster Taiwan’s dollar, which has slumped this year on the back of a stronger US currency, weaker export demand and rising geopolitical tensions.  The local dollar was down 4.5 per cent against the greenback in the past month, the third-worst performer among Asian currencies. BLOOMBERG

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