Taiwan Adopts Price Stabilization Measures

UNCLAS TAIPEI 001733 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH AND STRATFORD USDOC FOR 3132/USFCS/OIO/EAP TREASURY FOR OASIA/TTYANG TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI BOLIS E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taiwan Adopts Price Stabilization Measures ¶1. SUMMARY: In response to recent price rises, Taiwan authorities have adopted a series of measures, including import duty cuts for grain, an export ban on waste paper, enhanced vigilance on price hike collusion, and new gasoline price subsidies (septel). Although Taiwan's annualized inflation rate remains at 0.6%, authorities are concerned about potential inflationary increases, and are therefore trying to keep a lid on prices. Economic forecasters and businesspeople comment that these measures will be unlikely to harness growing inflationary pressure. Predictions for future inflation rate are a 13-year quarterly high of 3.8% in the last quarter of this year. END SUMMARY. Six Measures -------------- ¶2. After its weekly cabinet meeting on August 1, the Executive Yuan (EY) announced six price stabilization measures. The Ministry of Economic Affairs (MOEA) will change the weekly gasoline price adjustment system to keep prices lower, in addition to the gasoline price subsidies for buses and taxis adopted in late July (septel). For the next six months, the Ministry of Finance (MOF) will cut import duties for grain products in half. ¶3. The MOEA and the Fair Trade Commission (FTC) will conduct enhanced monitoring of price collusion. Premier Chang Chun-hsiung suspects, for example, that price collusion may affect corn, whose price has recently increased by 4.7% in Taiwan, versus a 17.1% decline in international prices. ¶4. Concerned that higher prices offered by foreign buyers are driving up domestic prices, the MOEA will temporarily limit exports of such products as iron & steel, gasoline, diesel fuel, waste paper, and sand & gravel. On a broader level, the MOEA also plan to launch an energy conservation campaign and promote renewable energy development. Monetary Instruments -------------- ¶5. Our contact of the Central Bank of China (Taiwan) (CBT) confirmed press reports that during the cabinet meeting, CEPD Chairperson Ho Mei-yueh proposed that the EY include the NT$ exchange rate and monetary instruments among the price stabilization measures. CBT Governor Perng Fai-nan refused, however, and said the NT$ exchange rate should not be used as a price stabilization instrument. According to Perng, the CBT has done its part in fighting inflation by raising benchmark interest rates every quarter over the past three years. Perng also indicated that the CBT has stepped up its open market operations, thereby reducing money supply growth. Comment -------------- ¶6. These price stabilization measures are likely to be ineffective as the current inflation threat stems primarily from import cost hikes beyond Taiwan's control. The Wheat Importers Association, for example, notes that the duty cuts are not enough to offset wheat import cost increases. Local economic forecasters, therefore, still anticipate that the inflation rate will increase from below one percent in the first half of this year to over three percent in the second half, with the Taiwan Institute of Economic Research's forecast rate reaching a 13-year quarterly high of 3.8% in the last quarter of this year. YOUNG