Taiwan’s Rate Hike

June 24, 2010

Taiwan became Asia’s sixth country to endure a rate increase.  The 12.5 basis point increase in the discount rate to 1.375% reverses the final of seven reductions engineered between September 26, 2008 to February 18, 2009.  Those easings had totaled 237.5 basis points and left the discount rate at a 55-year low.  Quantitative easing had already ended before today’s announcement, but considerable excess liquidity remains in Taiwan’s money market.

Analysts had not predicted today’s move, but it didn’t come as an entire surprise.  It was only a matter of time before this process of rate normalization would begin.  Taiwan emerged from recession in the second quarter of last year with a bang, not a whimper.  In the year to 1Q10, real GDP advanced 13.3%, led by exports and investment.  Industrial production in April was 31.4% larger than a year earlier.  The jobless rate is only 5.4%.  So even though consumer prices rose just 0.7% in the year to May, monetary authorities could not afford to delay monetary tightening much longer. More up-moves will need to follow today’s increase.  At 1.375%, the discount rate matches the previous record low reached in September 2004 and remains 225 basis points below the last cyclical high of 3.625% between June 2008 and September 2008.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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