By Liang-sa Loh and Yimou Lee
TAIPEI (Reuters) – Taiwan’s central bank revised up the island’s 2021 growth outlook on Thursday as strong exports bolstered its trade-reliant economy that has boomed on technology demand, and said it would likely tighten policy next year by raising rates.
Companies in Taiwan, home to major chip firms like Taiwan Semiconductor Manufacturing Co Ltd (TSMC), have benefited from laptop and tablet demand to support the work-and-study-from-home trend during the pandemic, as well as a global shortage of microchips.
The central bank raised its 2021 estimate for gross domestic product (GDP) growth to 6.03% from a 5.75% forecast in September, and kept the benchmark discount rate at a record low of 1.125%, as expected by all 25 economists in a Reuters poll.
Bank governor Yang Chin-long told reporters the economy was not overheating, inflation was in a controllable range and that they were paying attention to rate rise decisions by major economies.
The rate cut last year was to help Taiwan’s smaller firms, and their progress would help signal the future rate direction, he added.
“If their recovery is going well, then that’s a good opportunity to raise it up again,” Yang said, adding it theoretically could go back to where it was before being cut in March of last year at 1.375%.
Asked about the likelihood of a rate hike next year, Yang said “there is a possibility”.
The bank “definitely will be heading towards the direction of tightening”, he added.
Taiwan’s decision to hold fire on rates comes after the U.S. Federal Reserve on Wednesday said it would end its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022.
Kevin Wang, an economist at Taishin Securities Investment Advisory Co, said any rate rise next year would likely only come after the Fed moved first.
“I expect Taiwan’s central bank is more likely to raise the rate in the second half, and maybe do so twice,” he said.
Taiwan was one of the few Asian economies to grow in pandemic-hit 2020, expanding 3.11% that year – faster than China – after 2.71% growth in 2019.
GDP expanded in the third quarter of 2021 by 3.7% versus the year ago period, down from 7.43% in the second quarter, pulled lower by a partial lockdown to prevent domestic COVID-19 infections from spreading, but policy makers have predicted 6% or more growth for the full year because of the export surge.
For 2022, the bank said it saw GDP expanding 4.03%, compared to a previous prediction of 3.45%.
It has kept its policy rate unchanged at every quarterly meeting since cutting it in March 2020.
(Reporting by Liang-sa Loh and Yimou Lee; Additional reporting by Emily Chan; Writing by Ben Blanchard; Editing by Ana Nicolaci da Costa and Christian Schmollinger)
