By Dexter Murray

Raising Interest Rates to Fight Inflation

Taiwan’s Central Bank in late March raised its 2022 GDP growth forecast to 4.05%, up slightly from the 4.03% it predicted last December. The revision shows that despite slowing growth in Taiwan’s largest export markets and global uncertainty caused by the war in Ukraine, the Central Bank’s confidence in Taiwan’s economic performance this year remains unchanged. Earlier in March, the Bank warned that Russia’s invasion of Ukraine and the ensuing international sanctions on Moscow could depress global demand, negatively impacting Taiwan’s export-driven economy, and indicated that growth in 2022 could drop by 0.3-0.4 percentage points. Its latest forecast is a positive sign that the war’s impact on Taiwan’s economy is likely to be limited.

Although Taiwan has avoided major negative economic impacts from COVID-19, its economy is experiencing inflationary effects similar to that of other developed economies. While the rise in prices has been less severe than in the U.S., annualized inflation has exceeded the Central Bank’s warning threshold of 2% for the past several months. On March 2, the Bank announced that it would raise interest rates by 0.25 percentage points, from 1.125% to 1.375%, the first such hike since 2011 and the first adjustment in seven quarters. At that time, rates were dropped to a historic low of 1.125% to mitigate the economic impact of the pandemic.

The increased interest rates came sooner and were more significant in scale than most economists predicted. In response to the Central Bank’s announcement, several major lenders in Taiwan announced similar plans to raise interest rates, including the Bank of Taiwan, Taiwan Cooperative Bank, and First Commercial Bank. Consequently, mortgage rates will rise, although it is unclear whether this will be enough to cool Taiwan’s overheated housing market. The decision to raise interest rates may have been driven in part by Taiwan’s stellar employment numbers for March. Taiwan boasted unemployment of 3.61% in January, its lowest level in 20 years, according to the Directorate General of Budget, Accounting and Statistics (DGBAS). This figure, combined with continued strong demand for Taiwanese goods, likely prompted the Central Bank to use more aggressive growth-slowing measures to combat inflation. The Bank said it expects to bring down annualized inflation to under 2% by the end of Q3 this year. William Deng, an economist at Swiss banking group UBS, said in a statement that he expects the Central Bank to implement two more interest rate hikes in June and September.