Central bank raises key rates by 0.125%, despite Fed cut

The Central Bank of the Republic of China (Taiwan), or CBC, announced the rate increases after having its board meeting yesterday.

CBC announced a 0.125 percent increase for its discount rate, accommodations with collateral rate and accommodations without collateral rate from 3.125 percent, 3.5 percent and 5.375 percent to 3.25 percent, 3.625 percent and 5.5 percent, respectively. The new rates will be effective today.

CBC raised the rates in spite of a rate reduction by the U.S. Federal Reserve, which on Tuesday lowered its federal funds rate from 5.25 percent to 4.75 percent, after several subprime mortgage firms went out of business. The closings have created a credit crunch in the United States and have the potential to bring down the U.S. economy.

Some market experts, including Citigroup Taiwan, have predicted CBC will stop the spate of rate increases that began 12 quarters ago, in the interest of boosting the confidence of investors. However, yesterday the central bank said in a statement the effort to curb inflation remained a top priority for the government.

“From January to August, the consumer price index and the core consumer price index went up by an average of 0.62 percent and 0.87 percent, respectively, and the wholesale price index went up by 6.25 percent,” the central bank said.

“Moreover, given an increase in the price of imported raw materials, the CPI may rise by 2.34 percent in the bottom half and 1.48 percent for the year. Next year, the CPI may rise 1.46 percent,” it said, citing statistics from the Directorate General of Budget, Accounting and Statistics.

The central bank also suggested Taiwan’s economy has seen expansion, as the gross domestic product will go up by 4.58 percent this year. Meanwhile, the unemployment rate from January to July was 3.88 percent, the lowest since 2001, it said.

“After careful assessment, the CBC board decided that inflationary pressure still exists,” the bank said in the statement. “Given Taiwan’s low interest rate and the need to maintain price and financial stability in the long term, we have decided to increase key rates by a slight margin.”

The decision was announced after the close of trading on the island’s stock exchange. The TAIEX index rose 0.6 percent to 8,983.03. The Taiwan dollar was little changed at NT$33.066 against its U.S. counterpart, rising NT$0.024.

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