Taiwan central bank unexpectedly raises rates on inflation concerns

TAIPEI  -Taiwan’s central bank raised its policy rate on Thursday in a surprise move reflecting concerns about inflation despite recent market turmoil caused by U.S. and European bank failures, which could play into further rate decisions this year.

The central bank, in a unanimous decision, raised the benchmark discount rate by 12.5 basis points (bps) to 1.875 percent – the fifth hike since it began the current round of tightening in March last year.

Governor Yang Chin-long told a news conference after the meeting that the rate hike was mainly because of inflation concerns and that their monetary policy goal was to maintain the stability of domestic prices.

Taiwan’s rate hikes are mild and gradual, and while this move was not what the market expected, the central bank cannot be called hawkish, he added.

Asked if this would be the last rate rise this year, Yang said: “The uncertainty is very big, particularly the confidence and contagion effect on the public from the U.S. regional banks.”

Economists in a Reuters poll had mostly expected the central bank to stand pat, though eight of the 24 economists surveyed expected the central bank would lift the rate to 1.875 percent.

While the central bank raised its consumer price index forecast for this year to 2.09 percent from a December prediction of 1.88 percent, it again cut its 2023 estimate for economic growth to 2.21% from its previous forecast of 2.53 percent.

Kevin Wang, an economist at Taishin Securities Investment Advisory Co, said the economy may not start to improve until next month at the earliest.

“It is expected that inflation will fall below 2% in the second half of the year, so this time it should be the last interest rate increase” for the year, he added.

Taiwan’s trade-dependent economy is rapidly losing momentum as consumer demand swoons in major markets China, the United States and Europe, and as global inflation, rate rises and geopolitical pressures add more strains on business activity.

The island’s February exports fell annually for a sixth straight month to their lowest in two years.

Taiwan is a major producer of semiconductors used in everything from cars to smartphones, but with global consumer demand hit by high inflation and the war in Ukraine, GDP shrank 0.41 percent in the fourth quarter of last year.

The central bank said in a statement after the meeting that a rise in domestic food and electricity prices were pushing up inflation, but that it expected a gradual overall easing this year.

The decision came after the U.S. Federal Reserve on Wednesday raised interest rates by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs after the recent collapse of two U.S. banks.

Taiwan’s banks are in good financial health, Yang said.

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