Taiwan holds rates, sees inflation risk as growth slows

Taiwan’s central bank left interest rates unchanged on Thursday for the fourth straight quarter, as expected, joining others in Asia in holding rates in the face of global uncertainties but maintaining its guard over inflation.

The central bank left rates at 1.875 percent, unchanged since September 2011, as it balanced the need to support a slowing domestic economy with the possibility of rising prices. Most economists see rates unchanged this year barring any big improvement in the external environment.

It also took aim at one source of inflation, luxury house prices, with curbs on lending for top-end properties.

“The central bank’s decision has to balance external exports and domestic inflation; any tilt in the balance will lead to a change in the decision in H2,” said Tony Phoo, economist at Standard Chartered in Taipei.

“We expect exports will continue to remain low in H2 while inflation will pick up. But if there’s an improvement in exports and a major hike in inflation, then the central bank might lift rates.”

Evidence abounds recently of tough times for Asia’s exporters. Taiwan is one of the region’s most open, with an exports-to-GDP ratio of 74 percent, and is especially vulnerable to external shocks.

“Taiwan exports contracted 5 percent in January-May, while exports of major Asian countries still grew. This indicates Taiwan was hit harder,” the central bank said in a statement.

Taiwan cut its full-year growth forecast for a sixth time last month, saying Europe’s financial worries had hurt momentum for economic growth. Some economists see a further cut if Europe’s woes drag on.

Orders for Taiwan’s exports, a leading indicator of demand, fell in May for a third successive month. That came on top of three straight months of contraction in actual exports.

China’s factory sector contracted for an eighth straight month in June, with export orders and prices turning in their weakest showing since early 2009, a private-sector survey showed on Thursday.

Exports from South Korea have declined for four out of the five months of 2012 and Singapore’s non-oil exports also slipped in May from April. Adding to the gloom, US consumer confidence fell in June to a six-month low.

“As the global economic outlook remains uncertain and domestic economic growth is slowing, while inflation still needs to be watched, the board thinks holding rates will help achieve stability in inflation and financial systems as well as help economic growth,” the central bank’s statement said.

ON HIGH ALERT

Central banks in the Philippines, New Zealand, Thailand, Indonesia, India and South Korea have all elected to hold rates this month, while China and Australia have chosen to cut rates.

All 16 economists in a Reuters poll had predicted no change in Taiwan’s rates. For a timeline of Taiwan’s rate changes since 2001, see

Still, Taiwan’s central bank has a reputation for pre-emptive action. It was one of the first central banks in Asia to cut rates when the global crisis hit in 2008, and among the earliest to start lifting them again in 2010.

On the inflation side of the equation, traditionally the central bank’s main focus, imported inflation has eased in recent months along with the global slowdown, allowing the central bank room to keep rates on hold.

But government plans to raise domestic electricity and fuel prices have the central bank on guard, while heavy flooding in parts of Taiwan this month and the first tropical storm of the season to hit the island could push up food prices.

“The central bank is still very concerned about financial instability caused by housing prices and about widening inequality,” said Kevin Wang, economist at Taishin Securities Investment Advisory in Taipei.

“Price hikes in all sectors are expected in H2 due to higher electricity prices and bad weather, and the CPI might rise to over 2 percent.”

The central bank warned it was on “high alert” for any instability in the financial system caused by high property prices.

It announced a limit of 60 percent on mortgages for luxury properties, which it defined as those priced over $2.6 million in Taipei and $1.6 million elsewhere, and said borrowers must pay the principal and interest on the loan, not just the interest, to stop them leveraging the loan.

Some measures on property prices had been expected, after the central bank called in mortgage lenders last month to discuss loans for high-end property.

“Taking tougher measures against high-end properties is to protect banks, eventually to protect the public,” the central bank said.

Rising housing costs have become a sore point for ordinary Taiwanese. The average property costs eight times average annual income, while in the capital the ratio is 12 times and mortgages eat up 45 percent of income.

http://www.reuters.com/article/2012/06/21/taiwan-economy-rates-idUSL3E8HL1Q920120621

 

Category: Taiwan