June 13 2024: On Thursday, Taiwan’s central bank indicated that inflation is expected to gradually decrease for the remainder of the year, while maintaining a generally hawkish monetary policy stance.
Although Taiwan’s inflation levels have not reached those of major Western economies—with the consumer price index (CPI) rising by 2.24% in May—the central bank has prioritized reducing it.
Given Taiwan’s export-dependent economy, which has benefited from global demand for computer chips and the surge in artificial intelligence, concerns about impacting economic growth have been less pressing.
After the quarterly rate-setting meeting where the central bank left the benchmark discount rate at 2%, Governor Yang Chin-long told reporters that inflation is trending downward. The discount rate has been at this level since March.
However, “the tone of monetary policy is further tightening,” Yang said, emphasizing that unlike major Western economies, Taiwan’s rate policy adjustments will be “gradual and small” due to the relatively lower inflation in Taiwan.
“Tightening of monetary policy will help curb inflation expectations.”
In a Reuters poll, 29 out of 31 economists predicted the central bank would keep the rate unchanged.
The central bank slightly reduced its CPI forecast for this year to 2.12%, down from a previous prediction of 2.16%, but still above the 2% threshold that the market considers concerning.
On Wednesday, the U.S. Federal Reserve kept rates on hold and delayed the start of rate cuts, expecting only a gradual decline in inflation, but reaffirmed its plans to reduce borrowing costs this year.
Taiwan’s central bank raised its 2024 economic growth estimate to 3.77%, up from a March forecast of 3.22%, citing increasing demand for “newly emerging technology applications,” including AI.
The economy experienced its slowest growth in 14 years in 2023.
In an effort to curb rising property prices, the central bank also increased the reserve requirement ratios for banks by 25 basis points.
Yang stated that this move would make banks more cautious about their investments and new lending, reducing inflows into the property market and locking in more than T$120 billion ($3.71 billion).
Chengyu Liu, an analyst at First Capital Management, suggested there might be another reserve requirement increase at the next meeting in September, though not a rate hike.
“It is not all-round tightening that is needed,” Liu added.
($1 = 32.3290 Taiwan dollars)
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