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Taiwan Growth Probably Surpassed 8% as Inflation Pressures Set to Escalate

Taiwan’s economy probably expanded by more than 8 percent for the fourth straight quarter last quarter as exports increased, extending the island’s recovery and adding to the case for higher borrowing costs this year.

Gross domestic product climbed 8.34 percent in the three months through September from a year earlier, after rising 12.53 percent in the second quarter, according to the median of 17 estimates in a Bloomberg News survey. The statistics bureau will release the data at 4:30 p.m. tomorrow.

Taiwan’s government projects 8.24 percent economic growth this year, one of the fastest in the world. The expansion even as a stronger Taiwan dollar clouds the outlook for exports increases pressure on the central bank to tighten credit for a third time this year. The bank raised the benchmark rate in June and in September from a record low of 1.25 percent to tackle price pressures including the threat of a property bubble.

“The inflationary pressure will be more obvious next year and the central bank needs to take a preemptive measure to normalize rates,” said Tony Phoo, a Taipei-based economist for Standard Chartered Plc. “Prices of commodities and oil will trend up because of weakening U.S. dollar.”

Policy makers will increase the benchmark interest rate by 0.125 percent point in the quarterly meeting next month to bring the benchmark rate to 1.625 percent, Phoo predicted.

‘Overshoot’

Asia-Pacific officials are preparing for stronger currencies that may hurt exports and spark asset-price inflation after the U.S. Federal Reserve said this month it will pour $600 billion into the economy, funds that could head to emerging economies with better yields than in the U.S.

Taiwan’s currency could advance to less than NT$30 per dollar in the next six months to one year, ING Groep NV’s Head of Asia Research Tim Condon said in Taipei on Nov. 3.

Taiwan’s central bank said Oct. 19 it will step into the foreign-exchange market when the island’s currency “overshoots.”

The Taiwan dollar was unchanged at NT$30.732 against its U.S. counterpart at the 4 p.m. close yesterday, according to Taipei Forex Inc. It has climbed 5.5 percent in the past three months, the second-best performance in non-Japan Asia. The benchmark Taiex stock index rose 0.9 percent to 8,312.21.

Accelerating Inflation

“The recovery this year has improved earnings and prompted companies to add more jobs as they expand,” said Chuang Rehong, an economist at SinoPac Securities Corp. in Taipei. “Higher wages also indicate a sound rebound and pave the way for accelerating inflation.” Chuang forecast an increase of 12.5 basis points in borrowing costs and another 50 to 100 basis point boost in 2011. The median estimate of analysts surveyed by Bloomberg is for a 2.25 percent rate by the end of next year.

The island’s unemployment rate fell to 5.08 percent in September, the lowest in 21 months. Reviving demand for the island’s exports of computers and semiconductors prompted Taiwan Semiconductor Manufacturing Co., the world’s largest custom manufacturer of chips, to budget a record $5.9 billion spending on equipment this year. Chairman Morris Chang said on Oct. 28 that spending next year will likely be higher.

Taiwan’s exports climbed 21.9 percent in October, faster than the 16 percent rise that economists estimated. Exports are equal to about two-thirds of Taiwan’s economy.

Consumer prices rose for a second straight month to 0.56 percent in October, the statistics bureau said Nov. 5. Inflation this year may be less than the 1.23 percent estimated by the statistics bureau, and might exceed that figure in 2011, Perng Fai-nan, the governor of the central bank, said last month.

Record Home Prices

The central bank said in October that mortgage curbs introduced in June are “yielding results,” and that it has used “moral suasion” on 16 commercial lenders to ensure rules are followed for loans claiming vacant land as collateral.

Taiwan introduced mortgage restrictions, including a 70 percent cap on loans for second homes in the Taipei metropolitan area, after housing prices jumped and fueled concerns that an asset bubble may form.

Still, home prices in Taipei are set to rise for the seventh year in 2010, and record-high home prices may prompt the capital’s population to fall for a fourth straight year as people move to cheaper cities. The average existing-home prices in Taipei relative to annual disposable incomes climbed to the highest in two decades, according to Sinyi Realty Co., the island’s biggest housing broker.

Policy makers need to lift the benchmark rate from 1.5 percent now to 2.875 percent by the end of 2011 to prevent a housing bubble, Stanley Su, head of research for the property agency, said last month.

“The recovery won’t be a sustainable one that people welcome if they can’t afford to buy homes for themselves,” SinoPac Securities’ Chuang said.

To contact the reporters on this story: Chinmei Sung in Taipei at csung4@bloomberg.net. Jay Wang in Singapore at jwang298@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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