Taipei, June 18 (CNA) Inflationary pressure in Taiwan is expected to ease with lower international crude oil prices in the second half of this year, according to Kung Ming-hsin (龔明鑫), head of the National Development Council (NDC). .
Speaking to reporters on the sidelines of a carbon neutrality forum in Taipei on Friday, Kung said the recent surge in Taiwan’s consumer price index (CPI) was largely the result of rising soaring crude prices amid growing geopolitical tensions surrounding the Russian invasion of Ukraine.
However, Kung said he was bullish on lower crude oil prices in the second half of the year, helping Taiwan offset some of the headwinds caused by mounting inflationary pressure.
In May, Taiwan’s CPI rose 3.39% from a year earlier – the strongest growth in nearly 10 years and the third consecutive monthly increase of more than 3% – and growth in the CPI remains well above the 2% alert level set by the central bank. .
In May, fuel prices in Taiwan soared 12.62 percent from the same month a year earlier.
In addition to the rapid growth in fuel prices, the General Directorate of Budget, Accounting and Statistics (DGBAS) said the growth in the CPI in May was also due to the increase in food prices, which increased 7.40% year-on-year.
In the first five months of this year, local CPI growth averaged 3.04% year-on-year, with core CPI up 2.33%, according to DGBAS .
Central Bank raises interest rates twice in 2022
Due to the CPI surge in May, the central bank raised its key interest rates by 12.5 basis points, effective Friday, after concluding a quarterly policymaking meeting on Thursday.
It was the second rate hike by the central bank in 2022, following a 25 basis point hike in March, and comes at a time when many central banks around the world are preparing to fight inflation.
After the last rate hike, the benchmark Bank Rate, which rose from a historic low of 1.125% to 1.375% in March, now stands at 1.5%.
A day before Taiwan’s central bank announced its rate hike, the US Federal Reserve announced that it would raise its key rates by 75 basis points.
Although Fed Chairman Jerome Powell admitted that such a rate hike was “unusually large,” the Fed hinted that it would raise interest rates an additional 175 basis points during 2022. .
Since the Fed began a rate hike cycle in March, it has added 150 basis points to its key rates, while Taiwan’s central bank recently raised interest rates by 37.5 basis points.
Widening interest rate differential between Taiwan and the United States
Compared to a hawkish Fed, many market analysts suspect that a milder rate hike cycle will be launched by Taiwan’s central bank, which will widen the interest rate differential between Taiwan and the United States. .
Analysts said this could prompt foreign investors to shift their funds out of Taiwan into U.S. dollar-denominated assets, putting the Taiwanese dollar under depreciating pressure and creating volatility in the local currency market.
However, Kung didn’t seem overly concerned about the widening interest rate differential between Taiwan and the United States.
Kung said that prior to the Fed’s launch of a rate hike cycle in March, US federal funds rates ranged between 0 and 0.25%, while Taiwan’s key interest rates remained higher. to 1% ahead of a local rate hike cycle, which also started in March.
In addition, Kung said the inflationary pressure Taiwan faced was not as strong as in the United States, making aggressive central bank action similar to that of the Fed less warranted.
In May, the CPI jumped 8.6% from a year earlier in the United States, the fastest growth in four decades.
Other tightening measures
In addition to the 12.5 basis point rate hike, Kung said the local central bank had also decided to raise the reserve requirement ratio – the proportion of deposits that regulators require a bank to hold in reserves. and not on loan – by 25 basis points. points, starting July 1.
Kung said the decision to raise the reserve requirement ratio should help the central bank tighten monetary policy by withdrawing more funds from the market.
According to Kung, a silver lining is that the higher reserve requirement ratio will not impose a direct cost on individuals who have borrowed or will borrow from banks, thus having a limited impact on consumption.
The 12.5 basis point rise in interest rates and the 25 basis point rise in the reserve requirement ratio are expected to remove about NT$120 billion ($4.04 billion) from the banking sector, according to the central bank of taiwan.
Regarding rising inflationary pressures, the central bank expects Taiwan’s CPI to rise 2.83%, up from its previous estimate of 2.37%, while the bank has also raised its forecast for core CPI growth, which excludes fruits, vegetables and energy, from 1.93. percent to 2.42 percent.
June 18: Major lenders follow suit after central bank raises rates
June 16: the central bank raises interest rates by 12.5 basis points
June 16: Central bank lowers Taiwan’s GDP growth forecast for 2022 to 3.75%