Strong Economic Growth but No Rush to Hike: Taiwan Central Bank Likely to Keep Rates Frozen for 9th Consecutive Time in June

The Central Bank of Taiwan will hold its second-quarter board meeting on June 18. Initially, the market was concerned that the war in the Middle East would push up oil prices and add inflationary pressure. However, as negotiations between the US and Iran continue to progress, market concerns about the situation spiraling out of control have cooled slightly. Experts and scholars analyze that although economic growth is strong and major central banks are turning hawkish, domestic inflation is below 2%, meaning the central bank has no urgency to raise interest rates, and there is a high probability that interest rates will be frozen for the 9th consecutive time in June. Central Bank Governor Yang Chin-long stated in March that due to the impact of the war in the Middle East, major central banks are leaning towards a hawkish stance, and Taiwan's monetary policy is also moving in a tightening direction, making the second quarter a key observation point. As time approaches June, the US-Iran war has not yet ended. Although both sides have entered the negotiation stage, international energy prices remain high, and the Strait of Hormuz cannot return to normal in the short term. The market believes that a rate hike by the European Central Bank (ECB) in June is almost a certainty. The US is also finding it difficult to support a decision to cut interest rates due to significantly rising inflation data. The market is not only betting that the Federal Reserve will delay the timing of rate cuts but has even begun to discuss the possibility of raising rates again. With major central banks releasing hawkish signals, the interest rate decision at the Taiwan Central Bank's board meeting on June 18 is attracting attention. However, experts and scholars believe that while Taiwan's monetary policy is tightening, there is no rush to raise rates. Interest rates will likely be "frozen for the 9th time," and economic growth rates will be revised upward simultaneously. Lin Chi-chao, Chief Economist at Cathay United Bank, analyzed that the central bank's monetary policy mainly observes domestic economic conditions and inflation. Looking at the economic growth rate alone, it is not impossible for it to exceed 9% this year. In terms of inflation, after the outbreak of the Middle East war, the government adopted supply-side measures to stabilize domestic prices, freezing oil, electricity, and gas prices, thereby keeping the inflation rate below 2%. Lin believes that as long as the government's price stabilization measures continue, the CPI increase in the second quarter will not exceed 2%, and the possibility of it exceeding 2% for the whole year is not high. Under the condition that there is no urgency to raise rates, it is estimated that the central bank will keep interest rates unchanged in the second and third quarters. Wu Meng-dao, Director at the Taiwan Institute of Economic Research, pointed out that the Middle East war has indeed brought inflationary pressure. Looking at the international environment, central banks in various countries have released hawkish signals, but the only one that may actually take action at present seems to be the European Central Bank, with the market generally expecting the ECB to raise rates by 1 basis point in June. The US Federal Reserve's attitude has turned hawkish, but it would likely need to see inflation exceed 4% to have a more active willingness to raise rates. Wu analyzed that compared with major international central banks, the style of Taiwan's central bank has always been relatively passive and conservative, and it will not take the lead in adjusting monetary policy. Taiwan's economic growth rate this year is very strong, and it has enough foundation to raise rates, but considering that the inflation rate is less than 2%, the central bank tends to leave some time for observation, and it cannot be ruled out that there will be no rate hikes this year. In addition to moderate inflation, the targets of rate hikes may also be a factor for the central bank to consider. Lin pointed out that Taiwan's current economic growth structure is mainly supported by exports and investment, while private consumption is relatively moderate. When the AI supply chain companies supporting this economic boom have abundant funds and strong profits, the central bank's rate hike will not only have limited suppression effects but may instead increase the burden on mortgage holders and impact private consumption. Lin believes that the probability of the inflation rate exceeding 2% this year is not high, and the central bank has no short-term urgency to raise rates. However, whether the wealth effect driven by AI demand pushing high-speed economic growth and Taiwan stocks frequently hitting new highs will further drive consumption and inflation remains to be observed. In addition, Lin pointed out that in the face of changes in Taiwan's economic structure, whether the evaluation criteria for the central bank's monetary policy will be adjusted will also be a focus of external attention.