AI Frenzy Gives Taiwan Central Bank Room To Battle Inflation
Global demand for the hardware that underpins AI has sparked an economic recovery in Taiwan.
(Bloomberg) -- The insatiable global appetite for artificial-intelligence technology looks set to make Taiwan’s central bankers’ jobs easier.
Global demand for the hardware that underpins AI has sparked an economic recovery in Taiwan — a hub for the chips that drive the technology — and pushed the stock market to record highs. That’s giving policymakers in Taipei room to focus on taming stubbornly high inflation.
All 27 economists surveyed by Bloomberg expect the central bank to keep its benchmark interest rate unchanged at 1.875% for a fourth-straight quarter when its policy board convenes Thursday afternoon.
Economists also expect the central bank to keep borrowing costs at their current level for longer. They see policymakers waiting until the third quarter of next year before cutting rates by 12.5 basis points, according to the median forecast in the survey, nine months later than the previous survey found in January.
Read More: Taiwan Hints Key Interest Rates Will Stay Unchanged Next Week
Markets appear to be pricing in higher rates for longer, too. The one-year interest rate swap, a measure of policy rate expectations, rose to 1.62% on Tuesday, its highest since 2014 when Bloomberg began tracking the data, before settling around 1.60% on Wednesday.
Last week, central bank governor Yang Chin-long told lawmakers in Taipei that he was concerned about the upward pressure an expected electricity-price increase would put on consumer prices.
With uncharacteristic candor, Yang all but ruled out the possibility of a rate cut before June and warned Taiwan may see “structural changes” to its inflation that would make it impossible to go back to the low rates it enjoyed in the years following the global financial crisis.
Taiwan’s exports have gained over the past few months, even as growth in major overseas markets remains weak.
Taiwan’s benchmark stock index has also benefited, rising to historic highs, prompting a warning last week from Yang that investors may be getting carried away. The resulting boost to local investors’ spending power has exacerbated inflationary pressures.
“The strong growth outlook means demand side inflationary pressures are likely to remain high by historical standards, which suggests interest rate cuts in Taiwan are unlikely even as the rest of Asian central banks start to loosen policy,” said Shivaan Tandon, an economist at Capital Economics. “In fact, the risks in Taiwan are skewed towards further rate hikes.”
Read More: Taiwan to Decide on Power Tariff Hikes That Would Hit Chipmakers
In his report to lawmakers, Yang said the Taiwanese economy will likely quite easily reach the central bank’s most recent 2024 growth forecast of 3.12%, whereas the outlook for inflation is much more difficult to predict. The central bank forecasts consumer prices will rise 1.89% this year, not much less than the more-than 2% gains registered over the previous two years.
According to a Bloomberg survey of economists conducted over the past week, Taiwan’s gross domestic product is likely to grow 3.2% this year, more than forecast in the previous survey. The survey’s median forecast for inflation rose to 2%.
More stories like this are available on bloomberg.com
©2024 Bloomberg L.P.
