Taiwan's Real Interest Rates Will Turn Positive in 2013

Taipei, Dec. 20, 2012 (CENS)--Perng Fai-nan, governor of the Central Bank of China (CBC), pointed out yesterday (Dec. 19) that the CBC will stick to the “properly loose” monetary policy in the first quarter next year. He expected Taiwan's real interest rate will switch from negative to positive realm next year, due to lower inflation rate resulting from the higher comparison base of produce prices this year.

The Directorate General of Budget, Accounting, and Statistics (DGBAS) predicted that Taiwan's inflationary rate will reach 1.27% next year, lower than the existing 1.37% interest rate per annum for one-year time deposit. Therefore, the real interest rate is likely to turn positive next year, ending the negative-interest rate era, which has lasted two years.

Perng Fai-nan noted that cross-border fund movement, or hot money, will the major variable affecting the amount of domestic money supply. This is a problem for all small nations with an open capital account, including Taiwan, said Perng.

Perng made the remark following the quarterly meeting of the board of directors and supervisors of the CBC yesterday, which resolved to maintain the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral at the existing levels of 1.875%, 2.25%, and 4.125% per annum, respectively. Since September last year, this is the sixth quarter in a row for the CBC's board of directors and supervisors to resolve to keep the policy interest rates unchanged.

Citing forecasts by domestic and foreign economic institutions, Perng pointed out that Taiwan's GDP will grow over 3% next year, staging a U-type recovery, different from the V-type recovery in 2010, when the nation's GDP jumped 10.76%.

Perng stated that forecasts for Taiwan's economic growth rate next year by domestic and foreign economic institutions range from 5.4-2.9%, including 3.15% made by the DGBAS. Perng expressed that abnormal climate drove up produce prices this year, boosting the comparison base for the inflation rate next year, when the consumer price index (CPI) is expected to drop to 1.27%, down from this year's 1.93%.

The CBC pointed out that Taiwan's real interest rate stands at negative 0.6% now, at medium-high level globally, compared with negative 4.46% of Singapore, negative 4.08% of Hong Kong, negative 1.35% of the U.S., negative 2% of the euro region, and negative 1.9% of the U.K.

In response to the slow recovery, said Perng, the CBC will regulate market funds via open-market operation. In the first 11 months this year, annual growth rates of “banking loans and investments” and M2, money supply in broader definition, reached 5.03% and 4.22% respectively, with the M2 growth falling within the target zone set by the CBC. The CBC will maintain the target zone for M2 growth at 2.5-6.5% next year, similar to this year.