By Fanny Liu
TAIPEI--Taiwan's central bank kept its key interest rates on
hold as expected on Thursday, as the island's export-driven
economic recovery remains bumpy.
The Central Bank of the Republic of China (Taiwan) is in a tough
spot, economists say. Inflation may soon exceed the central bank's
tolerance amid ample liquidity and rising import prices of food and
fuel, which increases pressure on the bank to raise interest rates,
but the economy still needs an accommodative monetary policy to
promote a faster and more broad-based growth.
The central bank said Thursday the discount rate in the third
quarter will remain at 1.875%, the secured loan rate at 2.250% and
the unsecured loan rate at 4.125%. The bank hasn't changed the
three policy interest rates since July 2011.
Taiwan, a major electronics exporter, is on course to expand at
the fastest rate in three years this year, as demand from advanced
economies gathers steam. But exports, while recovering steadily,
have yet to return to strong growth levels last seen several years
ago. The island's manufacturing sector faces stiff competition from
China, South Korea and Southeast Asia, and China's increasing
reliance on locally produced raw materials is damping demand for
Taiwan's exports.
Mainly driven by "supply-side" factors such as global commodity
prices, Taiwan's CPI has been growing by more than 1.60% each month
since March, up from an average growth of 0.79% last year. While
the island's CPI growth remains one of the lowest in Asia, some
economists expect CPI growth to continue, and said it could exceed
the central bank's target of 2% in the third quarter.
At a press conference after the central bank's quarterly policy
review in Taipei, Gov. Perng Fai-nan tried to cool expectations for
an imminent interest-rate increase.
"Inflation is still under control," Mr. Perng said.
"A country raises interest rates when its economy overheats, but
Taiwan is still experiencing a negative-output gap--that's why our
monetary policy is still accommodative," he added.
As part of the efforts to rein in rising housing prices as
monetary conditions stay loose, the central bank said Thursday it
will lower the percentage of mortgage loans to home prices for
luxury homes and buyers with multiple properties.
Mr. Perng said home prices in some areas of the capital have
risen more than 40% over the past six months, which "will undermine
the stability of the banking system, hurt domestic consumption and
then the broader economy."
The central bank has also taken small steps to soak up
liquidity. Since August, the central bank has issued more
negotiable certificates of deposits to commercial banks and has
drained more than NT$200 billion from the money market.
Standard Chartered economist Tony Phoo, who had expected the
central bank to raise benchmark rates Thursday, said Mr. Perng's
comments showed that the central bank "prefers to err on the safe
side and ... wants to wait for more signs the recovery is
sustainable and gaining speed while upside risk to inflation
becomes more evident."
Some economists agreed with Mr. Perng.
"Taiwan's economy is not performing strong enough to warrant a
rate hike for now as negative output gap still exists," said Liang
Kuo-yuan, president of Yuanta Polaris Research Institute. Mr. Liang
added that Taiwan is still operating below its full potential, due
to uneven demand from developed economies and Taiwan's loss of
global market share in personal computers, smartphones and TV
panels.
Some economists say Taiwan's negative output gap is closing, as
the island's component makers benefit from their central role in
the global electronics supply chain. Analysts expect an iPhone 6
with a larger screen will come later this year, while faster
smartphones from other brands are set to increase demand for
components from Taiwanese factories.
The government expected Taiwan's economy to expand 2.98% this
year, the highest in three years. Last month's growth of exports
and overseas orders disappointed many economists, in part because
Taiwan has been bleeding market share in television panels and
smartphones. The latest domestic factory figures, which rose to
record high, suggest that global demand is still holding up well
and overall exports could grow more quickly in the future.
Write to Fanny Liu at fanny.liu@wsj.com