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Barclays expects central bank to raise rates in fourth quarter

TAIPEI--British banking group Barclays PLC expects Taiwan's central bank to start a cycle of raising rates in the fourth quarter of this year, as the local economy is heading for a recovery.

Barclays economist Waiho Leong said in a recent research note he expects the central bank to begin reducing liquidity as domestic demand in Taiwan is showing steady improvement.

The central bank is also concerned about inflation, Leong said.

The central bank is likely to raise its key interest rates by 0.125 percentage points in its quarterly monetary policymaking meeting scheduled for late December.

In its latest meeting in June, the central bank announced it would leave key interest rates unchanged. The central bank has left interest rates flat for 12 consecutive quarters in hopes it will boost the local economy.

The central bank has maintained the 1.875 percent discount rate, the 2.25 percent rate of accommodations with collateral, and the 4.125 percent rate of accommodations without collateral for three years.

Recently, amid improving export growth and a recovery in private consumption, the government's statistics agency, the Directorate General of Budget, Accounting and Statistics (DGBAS), raised its GDP forecast for Taiwan in 2014 to 3.41 percent, up from an earlier estimate of 2.98 percent.

The DGBAS expects Taiwan's real merchandise and services export growth in Taiwan dollar terms after inflationary adjustments will hit 4.53 percent for 2014. Private consumption growth will reach 2.62 percent.

Barclays said market confidence in Taiwan's economic outlook has strengthened so the chances are higher that the central bank will raise its key interest rates soon.

The British bank noted Taiwan is in its typhoon season. Bad weather could cause food prices to rise in August and September, which would increase inflation. This would add to pressure on the central bank to raise interest rates.

Taiwan's consumer price index in July rose 1.75 percent from a year earlier, its highest year-on-year growth since February 2013, when inflation grew 2.96 percent year-on-year.

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