Taiwan: Central Bank hikes rates again in June
At its monetary policy meeting on 16 June, the Board of Directors of Taiwan’s Central Bank (CBC) increased the policy rate from 1.375% to 1.50%. All of our panelists expected the Bank to hike, although a small majority expected slightly more aggressive tightening than the 12.5 basis point increase announced. The CBC also increased the reserve requirement ratio by 25 basis points.
The key justification for the move was the desire to get a grip on inflation, which is currently running at a near-decade high due to elevated import costs, and unfavorable weather conditions at home restricting the supply of fruit and vegetables. In light of recent developments, the CBC revised up its 2022 forecasts for inflation and core inflation markedly, to 2.8% and 2.4% respectively. Moreover, the Central Bank remained fairly upbeat on the outlook for GDP, thanks to the strength of the high-tech sector and an expected recovery in consumption once the current Covid-19 wave subsides, providing the leeway to keep hiking.
Looking ahead, further rate hikes are expected later this year as the Bank looks to dampen price pressures.
On the Bank’s latest move and the outlook, Iris Pang, economist at ING, said:
“Looking at Taiwan’s CPI inflation rate in relation to other major economies, Taiwan’s rate is moderate at 3.39% year-on-year in May, while the U.S., UK, and eurozone CPI inflation rates range between 8% and 9%. This also explains the smaller hike by Taiwan’s central bank. […] We believe a slower rate hike path is more appropriate for Taiwan, and we expect two more 12.5 basis point hikes in H2 2022 which should balance the risk of higher inflation and the uncertainty faced by the semiconductor sector.”