(March 21): Taiwan’s central bank unexpectedly raised its benchmark interest rate to the highest since 2008 as it ramped up efforts to tackle stubborn inflation with officials warning the chip-making hub could face a “structural shift” in prices.

Policymakers raised the discount rate to 2% at their quarterly meeting on Thursday. All 27 economists surveyed in a Bloomberg poll had forecast no change.

“Inflation has been high since 2021. The thing we worry about is that the whole structure of inflation has become a bit different now,” central bank governor Yang Chin-long said at a briefing following Thursday’s move. “We need to keep an eye on inflation expectations and whether electricity prices will go up.”

Inflation has been a persistent concern for officials. While mild by international standards, the consumer price index has shown gains of more than 2% for much of the past three years, higher than the central bank’s comfort zone. The most recent data show prices rose 3.08% in February versus the same month a year ago, the biggest gain since mid-2022.

One factor reinforcing Yang’s concerns higher levels of inflation may become the norm is government moves to hike electricity prices in the coming months to help stem losses at the government-owned Taiwan Power Co due to higher fuel prices.

Yang had already raised concerns about the impact the electricity-price hike will likely have on prices in a report to lawmakers last week. He warned Taiwan may see a “structural shift” in its inflation that would make it impossible to go back to the low rates it enjoyed in the years following the global financial crisis.

The central bank raised its inflation forecast for 2024 to 2.16% from its previous estimate of 1.89% made in December. The new forecast was based on the assumption that power prices would be raised by 10%, the report said.

Curb your expectations

The monetary authority said in Thursday’s report that the unexpected hike was primarily aimed at curbing inflation expectations. It pointed out that core inflation remains high, meaning it will be difficult for overall inflation to fall significantly soon.

Still, Yang said he expects inflation to gradually fall throughout the rest of the year.

The Taiwan dollar slipped to the weakest level since November ahead of the central bank’s rate decision this week amid strength in the US dollar and concerns over China’s growth.

Earlier this week, the Taiwan dollar’s one-year interest rate swap — a measure of policy rate expectations — surged to a record high, suggesting traders were pricing in an interest rate hike by the central bank.

“It was a surprise, but the market has prepared for this surprise to some extent,” said Kiyong Seong, lead Asia macro strategist at Societe Generale SA in Hong Kong. “Nevertheless, it doesn’t suggest that the central bank will keep hiking going forward. It looks like a final one-off adjustment.”