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Central bank increases key rate for 10th time on inflation fears

Central bank increases key rate for 10th time on inflation fears

Taiwan's central bank increased its benchmark interest rate for the 10th straight time to stave off inflation and narrow the gap in borrowing costs with the U.S. and other Asian countries.
Governor Perng Fai-nan and his fellow policy makers raised the discount rate on 10-day loans to banks by an eighth of a percentage point to a five-year high of 2.75 percent, the central bank said yesterday in Taipei after its quarterly policy meeting. The decision was expected by seven of 12 economists surveyed by Bloomberg News.
With Taiwan's key interest rate at about half the U.S. Federal Reserve's 5.25 percent, Perng is seeking to reduce the gap to stem money outflows and keep the currency stable. The Fed and central banks in China, South Korea and Thailand have halted rate increases in past months as their economies slowed.
"I expect the central bank to keep raising interest rates gradually in 2007 until they are back to a neutral level," Forest Chen, chief economist at Taiwan Securities Investment Advisory in Taipei, said before the meeting. "They will raise the benchmark interest rate by 0.125 percentage point at March's and June's meeting."
Taiwan's deficit on the financial account, which measures investment flows, was at US$6.17 billion in the third quarter compared with US$6.32 billion in the previous three months. The island has posted five straight quarters of shortfalls on the financial account.
Taiwan's benchmark rate is the second-lowest among Asia's main economies, after Japan's. South Korea's overnight call rate is at 4.5 percent, and China's official one-year lending rate stands at 6.12 percent.
Perng began the longest stretch of rate increases since at least 1991 in September 2004, three months after the Fed started raising borrowing costs. The benchmark rate is still below "neutral level", Perng said yesterday, suggesting more rate increases may come.
"Compared with last time, we are now approaching more toward the neutral level in interest rates," he said.
Inflation remains tame. Consumer prices rose for the first time in four months in November as energy costs increased. Inflation peaked at 3.58 percent in August 2005 and hasn't topped Perng's 2 percent ceiling since January.
Perng this week said inflation is "low and stable" and he'll adjust interest rates to an "appropriate level." The central bank is forecasting inflation of 1.75 percent next year, Perng told reporters yesterday.
"The core consumer price index for the first 11 months is only 0.52 percent, the lowest level in almost 10 years," Perng said in a statement as he reported to parliament's finance committee in Taipei on December 25. "We expect core CPI to be lower than 0.68 percent" forecast by the government's statistics agency.


Updated : 2021-06-19 15:09 GMT+08:00