March 27 (Bloomberg) -- Taiwan's central bank raised its benchmark interest rate for the 15th straight quarter to cool inflation and signaled that more increases are likely.

Policy makers increased the discount rate on 10-day loans to banks by 12.5 basis points to 3.5 percent, the highest in almost seven years, the central bank said in Taipei today. Twelve of 17 economists surveyed by Bloomberg News expected the move. Five predicted no change.

Inflation may top a government target of 2 percent this year, the central bank said in a statement. Rising consumer prices have prompted policy makers in Australia and Iceland to increase rates this year and persuaded the European Central Bank to keep its benchmark at a six-year high even as a U.S. economic slump threatens global growth.

``Inflation pressures are still quite elevated,'' said Frederic Neumann, an economist at HSBC Global Research in Hong Kong. ``The recent appreciation of the Taiwan dollar is not sufficient to squeeze out lingering price pressures.''

The central bank's decision was after Taiwan's markets closed. The benchmark Taiex stock index fell 1.9 percent today, while the Taiwan dollar slipped 0.6 percent to NT$30.18 against the dollar.

The key rate ``is getting closer to the neutral level,'' central bank Governor Perng Fai-nan said at a briefing. ``The inflation risk is rising, and this year's consumer price index may rise slightly more than 2 percent -- about 2.1 percent.''

`Modest' Increases

The central bank said it will maintain a policy of ``modest'' interest-rate increases.

Taiwan's annual inflation accelerated to 3.9 percent in February from 3 percent in January. The rate soared to a 13-year high of 5.3 percent in October. Prices may rise 3 percent in the first half, the central bank said.

The government this month scrapped a tax on imported wheat, corn, barley and soybeans to try to ease price gains. The cost of goods shipped into Taiwan soared 14.1 percent in February from a year earlier.

The central bank also announced alterations to lenders' reserve requirements today.

The reserve ratio for foreign-currency deposits will fall to 0.125 percent from 5 percent, effective April 1. That will help to narrow an interest-rate gap between Taiwan-dollar and foreign-currency deposits, it said, without being more explicit.

Passbook Deposits

``The cut in the foreign-deposit reserve ratio is aimed at mitigating the effect of higher rates on the banking system,'' said Wai Ho Leong, a Singapore-based economist at Barclays Capital. ``We'll probably see more appreciation of the Taiwan dollar.''

The central bank will slash the amount of interest it pays banks on reserves that originate from passbook deposits to 0.25 percent from 1.5 percent. It will raise interest payments on reserves from time deposits to 2.75 percent from 1.5 percent.

The worst housing slump in a quarter of a century in the U.S. threatens to limit demand for Taiwan's exports, which account for more than half of the island's economy. Closer ties with China, after Ma Ying-jeou's presidential election victory on March 22, may help to sustain growth.

``We have to reach a balance between inflation and economic growth,'' Governor Perng told parliament's finance committee on March 10. ``It's a very difficult job.''

The U.S. Federal Reserve has cut its key interest rate by 2 percentage points this year to restore confidence to financial markets and avert a recession in the world's biggest economy.

Interest-Rate Gap

Today's increase boosts the difference between the benchmark rates in Taiwan and the U.S. to 1.25 percentage points, the widest gap in almost 14 years.

That may spur demand for the island's dollar, the best- performing currency in Asia outside Japan this year.

JPMorgan Chase & Co. today forecast the currency will gain 3.9 percent this year versus the U.S. dollar, the biggest increase in more than two decades. Perng said that sovereign wealth funds are adding to demand for Taiwan's dollar, citing a Norwegian ``oil fund'' as an example.

A rising local dollar threatens to erode earnings from overseas sales, compounding the effects of the U.S. slowdown. Taiwan's government forecasts export growth will cool to 6.1 percent in 2008 from 10.1 percent last year.

To contact the reporter on this story: James Peng in Taipei at jpeng7@bloomberg.net; Chinmei Sung in Taipei at csung4@bloomberg.net.

Last Updated: March 27, 2008 08:16 EDT