"Taiwan's economy is still quite healthy," Perng told the finance committee of the Legislative Yuan, saying the impact of higher interest rates on corporate costs is limited.

The central bank may raise its key rate further to control inflation. "Maintaining price stability" is the monetary authority's goal, Perng said in a prepared statement to lawmakers yesterday.

The central bank increased its benchmark interest rate on Sept. 20 for the 13th consecutive quarter to combat inflation and stem a surge in investment overseas. The bank raised the discount rate on 10-day loans to banks by 12.5 basis points to 3.25 percent. A basis point is 0.01 percentage point.

The island's benchmark rate is the second lowest in Asia after Japan's, resulting in a record exodus of money as individuals and companies invest in higher-yielding assets abroad. Taiwan's dollar was the worst-performing major currency this year before this month's rate increase, adding to inflation pressure as the cost of imported goods climbed.

"The risk of potential inflation is rising," Perng said in the statement. An interest-rate increase "will help market rates gradually approach the neutral level to prevent inflation."

The central bank will "maintain order" in the foreign- exchange market if "abnormal factors, such as flows of hot money, cause overshooting," according to the statement.

He refuted a lawmaker's claim that the bank raised interest rates to buoy the domestic stock market by triggering inflows of foreign funds.

"There is no central bank in the world that would raise interest rates to boost the stock market," Perng said.

The central bank has no plan to buy gold to bolster its reserves for the Taiwan dollar, Perng said. The central bank has US$10.1 billion worth of gold reserves, he said

During the interpellations, lawmakers also urged Perng to reduce U.S. dollar holdings and increase the euro position in the central bank's forex reserves, so as to boost the investment gains of forex reserves.

But Perng said that the central bank's investment portfolios of forex reserves are changing every business day, but he declined to unveil how the portfolios are composed, so as not to affect international financial market orders.

In fact, Perng stressed, Taiwan has been enjoying higher gains than the global average from the operation of forex reserves. In the first nine months of the year, the central bank's forex reserves posted an annual increase of NT$22.8 billion. If including the unrealized gains of up to NT$79 billion, then the asset management return rate of the central bank would be more than double the figures released by the Ministry of Audit (MOA).

The MOA audited figures showed that the central bank's asset investment return rate dropped from 7.44 percent in 2003 to 4 percent in 2004 and 3 percent in 2005.

At the moment, Taiwan's outstanding forex reserves stand at around US$260 billion, ranking fourth in the world, behind China, Japan and Russia. The figure is only US$6 billion higher than recorded by South Korea.

But Perng told lawmakers that the principle of "the more, the better" can't be applied to the holding of forex reserves. "What counts most is that such reserves should be sufficient enough for use," Perng said.

He said the global average ratio of forex reserves to

gross domestic product (GDP) stands at 28.7 percent, but Taiwan's corresponding ratio hits a high of 73 percent.

In addition, Taiwan's forex reserves are sufficient enough to cover import expenses for 15 months, compared to the global average of 7.5 months, according to Perng.