Citi raises growth, inflation forecasts

Asia’s fourth-largest economy will expand 4.7 percent this year, up from an earlier estimate of 4.2 percent, Cheng Cheng-mao, chief economist at Citibank Taiwan, said at a briefing in Taipei yesterday. Consumer prices will increase 3.3 percent this year, more than a previous forecast of 2.8 percent, he said.

Growth exceeding expectations may allow Taiwan’s central bank to increase borrowing costs to cool inflation. The island nation may raise interest rates from a seven-year high in September, Cheng said. Taiwan’s export growth unexpectedly accelerated in June to reach a record US$24.3 billion on strong demand from China, Europe and Japan. “Although domestic demand in Taiwan isn’t growing, exports in the first-half were unexpectedly strong,” Cheng said. “The fiscal expenditure in the second half is also expected to rise and that will boost the economic growth.”

Cheng expects “double-digit” growth in Taiwan exports in the third quarter, before the expansion in overseas sales declines to a “single-digit” pace in the fourth quarter as demand drops amid weakening U.S. consumption.

Taiwan may raise interest rates by 0.125 percentage points in September, as well as order banks to set aside more cash as reserves to contain inflation, Cheng said. The central bank in June increased its benchmark interest rate to 3.625 percent, and gave a surprise order for lenders to increase the proportion of passbook deposits they set aside to 11.025 percent.

Inflation accelerated to 4.97 percent in June, the fastest pace in eight months, as fuel and food costs climbed. Taiwan’s economy may grow 5.1 percent in 2009, and consumer prices may rise 2.5 percent, Cheng said.

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