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Central bank likely to raise interest rate before end of 2014

TAIPEI, Taiwan -- With rising consumer goods prices and a better economic outlook, some local banks predict that the Central Bank of Taiwan will raise the interest rate by 0.125 percentage points by the end of the year.

U.S. Federal Reserve Chair Janet Yellen is slated to speak at the annual Jackson Hole Economic Symposium conference on Friday. Many expect Yellen's speech will touch on interest rates. With an improved job market in the U.S., analysts expect the Fed to raise the interest rate ahead of schedule.

As the U.S.' fiscal policies are very likely to impact the local economy, the Jackson Hole meeting's agenda is closely monitored by the Central Bank of Taiwan.

Central Bank governor Perng Fai-nan (彭淮南) said earlier that Taiwan is like a small fishing boat compared with the aircraft carrier of the U.S. economy. “A small fishing boat is bound to be affected by a passing aircraft carrier,” Perng said.

A Rising Consumer Price Index

According to Barclays' latest report, July's consumer price index (CPI) rose 1.75 percent to reach a new high in 17 months. While the 4.3-percent rise in food prices was less than expected, the arrival of typhoon season is still likely to hike up prices.

With domestic demand expected to rise steadily, Barclays forecast that Taiwan will see a 4.1-percent GDP growth this year.

As the government grows more confident in Taiwan's economic performance, Barclays predicted the Central Bank will raise the interest rate by 0.125 percentage points in the fourth quarter in an effort to reduce capital flowing in the market.

In February and August, the Central Bank issued more one-year and two-year certificates of deposits, which was interpreted by analysts as a prelude to raising the interest rate by the Central Bank.

The U.S. Fed May Raise Interest Rates in Q3

Some analysts predicted that the Fed will raise the interest rate in the third quarter, Central Bank governor Perng said, adding that the Fed may do so by either raising the excess reserve ratio or performing reverse repo.

In the first scenario, the Feb may raise the reserve ratio from 0.25 percent to 0.5 percent. This will lead to an increase in the Federal Funds Rate from 0.1 percent to 0.35 percent.

Regarding how Taiwan will cope with the new financial environment, Perng pointed out that the Central Bank might issue negotiable certificates of deposit (NCD) to retrieve floating capital in the market as well as to suppress inflation.

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