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.