Taiwan central bank signals end to rate hikes next year

© Reuters. People leaving Taiwan's central bank in Taipei, Taiwan, December 14, 2022. REUTERS/Ann Wang

By Liang-sa Loh and Sarah Wu

TAIPEI (Reuters) -Taiwan's central bank on Thursday said it expects inflation to drop below 2% next year, which would signal an end to the current round of rate hikes, and slashed its growth outlook for this year to reflect global economic woes.

The decision came after the U.S. Federal Reserve raised interest rates by an expected 50 basis points on Wednesday and said it would deliver more interest rate hikes next year even as the economy slips towards a possible recession.

Taiwan's central bank, at its quarterly monetary policy meeting, raised the benchmark discount rate by 12.5 basis points to 1.75%, in line with economists' expectations in a Reuters poll.

However, it eased off on tightening by announcing no new rise in the various ratios it sets for banks' reserve requirements, after increasing the rates at its previous two quarterly meetings.

Governor Yang Chin-long told a news conference after the meeting that inflation would fall below 2% next year.

"If it's certain that the inflation rate is below 2%, we will stop raising interest rates, but there is still a lot of uncertainty," he added.

Taiwan's inflation, never as bad as in the United States or Europe, is already easing: The consumer price index was 2.35% higher in November than a year earlier, the lowest reading in nine months.

But the trade-dependent economy is loosing momentum as consumer demand swoons in major markets China, the United States and Europe. Taiwan's exports last month slumped 13.1% year-on-year, far worse than forecast.

"As long as inflation is controllable, we believe under the premise of ensuring economic growth the central bank will next year most likely end this cycle of monetary policy tightening," said Tony Phoo, Standard Chartered (OTC:SCBFF)'s senior Taipei-based economist.

The central bank again cut its 2022 estimate for gross domestic product growth, to 2.91% from its previous forecast of 3.51% in September.

For 2023, it projected that GDP would grow 2.53%, compared with an earlier forecast of 2.9%. The economy grew 4.01% in the third quarter from a year earlier.

"Next year, the global economy will slow down and downside risks will continue to increase, affecting exports and investment momentum, and domestic economic growth is expected to cool down," it said in a statement.

The bank also reiterated it would intervene if the foreign currency market "overly fluctuates". The Taiwan dollar has depreciated more than 9% so far this year against the U.S. dollar, although it has not fallen as much as the Japanese yen.