Taipei: With domestic inflation surpassing the 2 percent alert level for a fourth consecutive month in August and several major central banks around the globe increasing their key interest rates, Taiwan's central bank is encountering mounting pressure to raise rates at its upcoming quarterly policymaking meeting scheduled for Thursday, according to economists.

According to Focus Taiwan, at its March meeting, the central bank maintained interest rates unchanged for the ninth consecutive quarter with the discount rate at 2.0 percent. Central Bank Governor Yang Chin-long noted at a post-meeting news conference that the bank held a somewhat hawkish stance, with two board directors expressing support for a rate hike during the meeting.

Cathay United Bank chief economist Lin Chi-chao highlighted inflation concerns in a recent interview, stating that the central bank had predicted in June that Taiwan's consumer price index (CPI) would rise by less than 2 percent in 2026. However, the landscape has shifted due to rising international crude oil prices amid escalating Middle East tensions. Lin cited an August forecast by the Directorate General of Budget, Accounting and Statistics (DGBAS) projecting a 2.07 percent increase in Taiwan's CPI for 2026. He emphasized the importance of considering the monetary policy decisions of other major central banks when deciding on interest rate adjustments.

The Bank of Korea recently increased its benchmark interest rates from 2.50 percent to 3.00 percent with consecutive hikes in July and August. The European Central Bank also raised its key rates by 25 basis points on Thursday, marking its second rate hike this year. Lin noted that the Bank of Japan might raise rates next week, and the odds of the U.S. Federal Reserve increasing rates have risen to nearly 90 percent after August CPI data indicated persistent inflationary pressure.

Lin further observed that, given Taiwan's expected economic growth of over 11 percent in 2026, the local economy should be capable of absorbing the impact of a rate hike. Gordon Sun, director of the Taiwan Institute of Economic Research's Economic Forecasting Center, echoed this sentiment. He anticipates the U.S. Federal Reserve will raise rates next week, a day before Taiwan's central bank meeting, which could influence Taiwan to follow suit. Sun noted that a broader interest rate spread between Taiwan and the United States would be a significant consideration if Taiwan's rates remain unchanged.

Sun pointed out that a central bank rate hike would not primarily aim to curb inflation but rather to address tightening liquidity in the local market. The current AI boom has spurred increased fund demand as companies enhance investments, and a thriving stock market has further tightened liquidity. Consequently, market interest rates have risen, prompting the central bank to consider raising its key interest rates.

However, Sun expressed concerns about a rate hike's potential impact. While Taiwan's economic growth is largely driven by AI development, the traditional economy lags, which means higher interest rates could impose a heavier financial burden on traditional industries.