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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World Taiwan surprises with first rate rise after crisis Reuters - Friday, June 25 Send IM Story Print * Raises rates to 1.375 percent from 1.25 percent * First rate rise since June 2008, seen symbolic move * Central bank cites housing market, domestic consumption * However, inflation benign, although seen picking up * More rate rises to follow, analysts say By Faith Hung TAIWAN, June 24 - Taiwan's central bank unexpectedly raised interest rates on Thursday by 12.5 basis points to 1.375 percent, citing a pick up in the housing market, expanding exports and investments and improved employment. Taiwan adds its name to a list of Asian central banks that are starting to withdraw the extraordinary monetary stimulus put in place during the global economic crisis as the region leads the global recovery, although it has by far the lowest inflation. All 11 economists polled by Reuters had expected the central bank to leave its interest rate unchanged at 1.25 percent. Governor Perng Fai-nan had said at the last review in March that a period of ultra loose monetary policy was over and the central bank repeated that message again on Thursday, prompting analysts to expect further rate increases this year. "I think there's a possibility that the central bank would raise rates again," said Rehong Chuang, assistant manager of research at Sinopac Holdings in Taipei. "I wouldn't rule that out." Still, analysts said the increase of just 12.5 basis points would have little economic impact and the move was more to signal to financial markets that the central bank was starting the process of returning interest rates to normal level. "This sort of breaks down the wall now," said Joseph Lau, an economist at Credit Suisse in Hong Kong, who said a normal rate level would be around 3 percent. "It's no longer a case of waiting for when they are going to make the first move to raise rates. It's easier now to make adjustments going forward. "At the end of the day, a 12.5 basis point increase is pretty token. The real guidance has come from the money market where the central bank has allowed the overnight rate to come up and will probably now go a little bit higher." Lau said rates could rise another 25 basis points this year. BENIGN INFLATION At 0.74 percent, Taiwan inflation is by far the lowest among those Asian centres that have raised interest rates so far since the global crisis. Perng said inflation would be below 1.4 percent in the second half of the year. India, which follows wholesale prices as its benchmark price indicator, has inflation above 10 percent. Nearest to Taiwan, Malaysia's inflation is 1.6 percent. Taiwan's central bank acknowledged the rate rise was mild and that the debt crisis in the euro zone, which buys just over tenth of Taiwan's exports, could affect demand for the island's goods. But otherwise Perng painted a picture of economic recovery. Other than the housing market and consumption, the central bank also said exports and investment were expanding sharply. It noted that the jobless rate had improved and said the rate rise would help with inflation and support financial system stability. Taiwan's exports, a major pillar of the economy, have been growing at a double digit annual pace for some months. Gross domestic product grew at a double digit pace in both the fourth quarter of 2009 and the first quarter of 2010, on a seasonally adjusted, annualised basis and unemployment has come down steadily from a record high in September. [ID:nSGE64J0G6] [ID:nTPV001677] "Looking at the numbers, most indicators are back to pre-crisis levels so that is one of the points for them to look into rate normalisation," said Joanna Tan, an economist at Forecast in Singapore. "Also, there is the property sector heating up and they do want to ensure that it is not going to escalate." The central bank has adopted several measures to control a sharp rise in property prices in parts of Taiwan, including inspections of banks' lending and requests for information on mortgage practices. On Thursday, the central bank said it had asked banks not to loan more than 70 pct of the value of the collateral for any loan to buyers in Taipei and 10 surrounding cities. It added that the ratio of mortgage loans to total loans at banks is high at 38.3 percent. Tan added that Taiwan was not particularly exposed to economic problems in Europe compared with elsewhere in Asia and part of the central bank's confidence to raise rates may relate to a landmark trade deal Taiwan will sign with China next week. The deal will cut tariffs on more than 800 products and open up service industries such as banking, giving a boost to annual two-way trade that is currently worth around $100 billion. [ID:nTOE65N04R] [ID:nECFA] Central banks in India, Malaysia, Australia and New Zealand have raised rates as the region rebounded from the global economic downturn. Singapore, which uses the Singapore dollar as its main monetary policy tool, revalued the currency in April. However, major central banks, including the U.S. Federal Reserve and the European Central Bank, have shown little inclination to start raising their interest rates anytime soon. 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