(Bloomberg) — Taiwan’s central bank delivered a smaller-than-expected increase to its benchmark interest rate in combination with moves to reduce liquidity in the banking sector as officials seek to rein in inflation without exacerbating slowing growth.
The central bank increased its policy rate by 12.5 basis points to 1.5% on Thursday.
Most economists surveyed by Bloomberg expected a 25 basis-point move after a surprise hike of that magnitude last quarter.
The bank also raised its reserve requirement ratios by 25 basis points, which Governor Yang Chin-long said would take NT$120 billion ($4 billion) out of circulation.
“This was a very difficult decision,” Yang said at a briefing following Thursday’s announcement.
“Inflation is certain to rise further but we also had to consider the potential hurt to sectors reliant on domestic demand so that’s why we decided to raise the rate by a little less and implement liquidity controls.”
It is the first time Taiwan’s policy makers have combined two such hikes since 2008.
Officials are seeking to strike a balance in taming persistently high inflation without hurting the economy at a time when Russia’s invasion of Ukraine and repeated Chinese Covid lockdowns are causing chaos to global supply chains.
The central bank downgraded its forecast for economic growth this year to 3.75% from its previous estimate of 4.05% made in March.
Officials also see inflation getting worse, raising their outlook for the year to 2.83% from their earlier projection of 2.37%.
“Taiwan’s policy makers cannot afford a bigger hike,” said Christopher Wong, senior foreign exchange strategist at Malayan Banking Bhd.
in Singapore. “The central bank reverted to their typical pace of 12.5bps hike as some sectors of the economy, such as tourism and the self-employed, still need support and there are signs of growth momentum slowing ahead.”
The services sector has been affected by Taiwan’s first major Covid outbreak in recent months.
The health authorities have reported tens of thousands of cases a day, even as they ease restrictions in a push to live with the virus. While border restrictions still remain, the government has signaled it intends to reduce the mandatory three-day quarantine on entry further in the coming months.
The central bank move followed the Federal Reserve’s interest rate hike of 75 basis points Wednesday, its biggest since 1994.
A widening gap between borrowing costs in Taiwan and the US could exacerbate downward pressure on the Taiwan dollar. The currency has weakened about 6.5% against the greenback in the past six months, closing at 29.735.
The local stock benchmark has fallen for the past six days.
Governor Yang has repeatedly said rates in the world’s major economies play a factor in the monetary authority’s decision-making process.
(Earlier story was corrected to show central bank raised rates in headline, first deckhead.)
(Updates to add stock performance in second last paragraph.)
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