Typhoons Seen Fanning Taiwan's Inflation Threat
Date: 30-Jul-08
Country: TAIWAN
Author: Lee Chyen Yee
Economists from JPMorgan, KGI Securities, Mega Securities and Standard Chartered expect July's inflation to be more than 5 percent, slightly higher than June's 4.97 percent, following the two storms. Mega had the highest forecast of 5.6 percent, which would be a near a 14-year peak.
Full-year inflation forecasts ranged from 2.9 percent to 4.2 percent, with some economists saying those estimates could rise, which could prompt the central bank to lift interest rates again in September. Taiwan's government expects 2008 inflation to be at 3.3 percent.
"With the typhoons, that will possibly accentuate, or magnify, the spike (in inflation) in July and August," said Grace Ng, an economist with JPMorgan, who expects July's inflation to exceed 5 percent and August at slightly below 5 percent, barring any major weather disasters.
Prices of food, which make up about a quarter of Taiwan's consumer price index, have been surging as the bad weather crimped supplies of fruit and vegetables. In some parts of Taiwan, prices of leeks rose by 40 percent in a week, media reported.
"Nobody wants to buy leafy vegetables because prices have gone up so much. They are buying melons instead," said a vegetable seller, sweeping her stall the day after the latest typhoon passed through, amid a dearth of customers.
"Some people bought vegetables in bulk a few days ago because they were afraid prices will go up further," she added.
However, economists largely expect inflation to ease gradually from September onwards due to high base measurements during the same period last year, when the weather was exceptionally unfavourable.
"We'll have a more gradual decline," said Tony Phoo, an economist at Standard Chartered, referring to inflation in the fourth quarter.
With headline inflation expected to ease late this year, most economists are predicting the central bank will lift interest rates in the third quarter by a small 12.5 basis points.
However, opinions are mixed on whether the central bank will hold rates steady or lift them further in the fourth quarter.
The central bank has been raising its main policy rate since October 2004, bringing it to a 7-year high of 3.625 percent.
"The indicators point to a slowdown in (economic) growth momentum, so I think the central bank will more or less be aware of it, and I don't think at this stage it wants to send the wrong message by tightening up too aggressively," Phoo said.
(Additional reporting by Jeanny Kao and Gina Chang; Editing by Ken Wills)
