By Dexter Murray
Raise interest rates to fight inflation
In late March, the Central Bank of Taiwan raised its GDP growth forecast for 2022 to 4.05%, up slightly from the 4.03% it forecast last December. The review shows that despite slowing growth in Taiwan’s major export markets and global uncertainty caused by the war in Ukraine, the Central Bank’s confidence in Taiwan’s economic performance this year remains unchanged. Earlier in March, the Bank warned that Russia’s invasion of Ukraine and ensuing international sanctions against Moscow could depress global demand, negatively impacting Taiwan’s economy focused on exports, and indicated that growth in 2022 could fall by 0.3 to 0.4 percentage points. Its latest forecast is a positive sign that the impact of the war on Taiwan’s economy is likely to be limited.
Although Taiwan has avoided major negative economic impacts from COVID-19, its economy is experiencing inflationary effects similar to other developed economies. While price increases have been less severe than in the United States, annualized inflation has exceeded the Central Bank’s 2% warning threshold in recent months. On March 2, the Bank announced that it would raise interest rates by 0.25 percentage points, from 1.125% to 1.375%, the first such hike since 2011 and the first adjustment in seven quarters. At that time, rates were lowered to an all-time low of 1.125% to mitigate the economic impact of the pandemic.
The rise in interest rates came earlier and was larger than most economists had expected. In response to the Central Bank’s announcement, several major Taiwan lenders announced similar plans to raise interest rates, including Bank of Taiwan, Taiwan Cooperative Bank and First Commercial Bank. As a result, mortgage rates will rise, although it is uncertain whether this will be enough to calm Taiwan’s overheated property market. The decision to raise interest rates may have been prompted in part by the excellent employment figures in Taiwan in March. Taiwan had an unemployment rate of 3.61% in January, its lowest level in 20 years, according to the Directorate General of Budget, Accounting and Statistics (DGBAS). This figure, combined with continued strong demand for Taiwanese goods, likely prompted the central bank to use more aggressive growth-slowing measures to fight inflation. The Bank said it expects to bring annualized inflation down to below 2% by the end of the third quarter of this year. William Deng, an economist at Swiss banking group UBS, said in a statement that he expects the central bank to implement two more interest rate hikes in June and September.