The central bank on Thursday surprised the market by announcing to raise its three benchmark interest rates by 12.5 basis points, effective Friday. Prior to Thursday, the central bank had cut interest rates by a total of 237.5 basis points since September 2008, and most economists had forecast the bank would not raise rates until later this year or early next year.
So, what was the main reason prompting the central bank to make its first rate move since February last year? Based on the bank’s press statement and what central bank governor Perng Fai-nan (彭淮南) said on Thursday, it was aiming to gradually bring market rates up to “normal levels” after it halted quantitative easing measures in March, because it was concerned about negative “real” interest rates — when the nominal interest rates are lower than the inflation rate.
Therefore, as expected, the central bank on Friday raised the interest rates on its daily offerings of negotiable certificates of deposit by six basis points in order to bring down the level of excess funds in the market. Several state-run banks have also decided to follow the central bank’s move and are hiking their savings and deposit rates by between 0.01 percentage points and 0.125 percentage points, effective tomorrow.
Apart from raising interest rates at a time when the nation’s economy is recovering and unemployment is decreasing, the central bank also announced on Thursday several credit-tightening measures to curb property speculation in the greater Taipei area.
For instance, the central bank decided to impose a 70 percent cap on all banks’ loan-to-value ratios to mortgage applicants when buying second houses in Taipei City and 10 cities in Taipei County and remove grace periods for those applicants’ loan repayments.
The central bank has taken some other measures since October last year to curb speculation in the local housing market and the latest move was consistent with its policy of cooling the property market down in major cities, but the targeted credit-tightening measures on mortgage loans this time is the bank’s first such move in two decades.
Indeed, a rate hike of only 12.5 basis points demonstrated the central bank was leaving itself a certain flexibility. It also suggested the bank is confident in Taiwan’s export-oriented economy and willing to raise interest rates without too much concern about Europe’s debt crisis and others’ external problems.
However, a small margin like that, coupled with the targeted credit-tightening on mortgage loans, implies the bank was making acting pre-emptively to cool property prices in the big cities, believing it had to take real action rather than relying on moral persuasion.
The central bank’s latest move may signal the beginning of a cycle of rate hikes and credit-tightening measures in this country. Whether property prices in major cities will start falling, however, remains to be seen.
Most importantly, the government should not let the central bank be alone in battling the looming threat of housing bubbles. Other agencies must move faster and act efficiently to deal with rampant property speculation and opaque real estate information. After all, this issue is certain to gain even more attention as housing affordability becomes a hot topic ahead of the special municipality elections in November and the presidential election in 2012.
Source: Taipei Times - Editorials 2010/06/27
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