Taipei, May 15, 2008 (CENS)--In view of the inevitability of raising domestic oil prices and power rates, Paul Chiu, vice premier-designate, admitted the difficulty of curbing the consumer price index (CPI) under 2% this year.

In response, financial-circle insiders predicted that the Central Bank of China (CBC) would further raise interest rates, while allowing the NT dollar to appreciate, so as to contain the inflationary specter.

Chiu noted that the new administration is leaning towards hiking domestic oil prices in one fell swoop, while raising power rates in stages. Under such a strategy, the impact on the domestic prices would be maintained within an acceptable range, said Chiu. He stressed that corresponding measures will be adopted to cushion the impact of oil-price and power-rate hikes, ruling out subsidies for specific groups, though.

Mega Financial Holding estimates that should the domestic oil prices be raised by NT$3 per liter, or at a scale of 11%, the CPI would be added with 0.33 percentage points. The CPI would advance 0.66 percentage points, in case the power rates are hiked by 30%. Therefore, simultaneous hikes of oil prices and power rates would add one percentage point to the CPI.

In such a scenario, the CPI hike may hit 5% this year, compared with existing 2.7% interest rate per annum for one-year time deposits, bringing back the era of negative interest rates.

Banking executives noted that simultaneous upward movements of interest rates and NT dollar`s exchange rate can not only put a damper on inflation, but also attract the influx of foreign capital, thereby vitalizing the domestic capital market. They, therefore, believe the CBC`s board of directors will raise the interest rate by 0.125 of a percentage point at the end of June.
(by Philip Liu)