Taiwan will probably increase borrowing costs tomorrow for the third time this year to curb gains in property prices and tackle accelerating inflation. Governor Perng Fai-nan will raise the benchmark interest rate by 0.125 percentage point to 1.625 percent, according to all 14 economists in a Bloomberg News survey. Perng boosted the rate by the same amount in June and September from a record-low 1.25 percent. The decision is due after 3 p.m. in Taipei. Taiwan would join China and Thailand in raising borrowing costs this month, even as higher rates risk stoking currency appreciation by attracting more foreign capital. The central bank tightened curbs on exchange-rate derivatives this week, stepping up efforts to stem fund inflows that have threatened trade gains by driving the local dollar to a 13-year high. “The central bank must hike rates to tame inflation,” said Tetsuo Yoshikoshi, a senior economist at Sumitomo Mitsui Banking Corp. in Singapore. Regulations are also “very likely” to be further tightened in future to counter speculative funds that may be drawn by the increase, he said. The Taiwan dollar rose 3.2 percent to NT$29.420 against its U.S. counterpart at the midday break today, according to Taipei Forex Inc., after touching NT$29.375, the strongest level since October 1997. The benchmark Taiex stock index fell 0.1 percent to 8,853.78. The local dollar has risen 9.3 percent over the past six months against the U.S. currency, the most in Asia, according to data compiled by Bloomberg. Projections by the International Monetary Fund show Taiwan’s economy will grow at one of the world’s fastest rates in 2010, boosting the allure of its assets. Tackling Speculation The curbs on derivatives will help to combat currency speculation by foreigners, the central bank said two days ago. The island last month also restricted offshore funds to investing no more than 30 percent of their portfolios into local government debt and money-market products. “The central bank has been intervening to keep the gain in the currency in line with other Asian currencies” such as South Korea’s won, Yoshikoshi said. Officials from Asia to Latin America have sought to curtail fund inflows, complaining the U.S. Federal Reserve’s plan to inject $600 billion into the world’s biggest economy may intensify capital flight to higher-yielding emerging markets. Currency gains risk crimping exports by companies such as Taiwan Semiconductor Manufacturing Co., the world’s largest custom manufacturer of chips, in an economy where exports are equivalent to about two-thirds of gross domestic product. Inflation Risks Full-year economic growth will exceed 10 percent this year and the island faces inflation risks in 2011, Minister of Economic Affairs Shih Yen-shiang said in Taipei yesterday. Consumer prices climbed 1.53 percent in November, the fastest pace in nine months, a report showed Dec. 6. Property prices in the capital have advanced 11 percent in January through November to a record, Sinyi Realty Co.’s Chief Analyst Stanley Su said in a telephone interview this week. Mortgage curbs introduced in June, including a 70 percent cap on loans for second homes in the Taipei metropolitan area, are “yielding results,” the central bank said in October after home-price gains stoked fears of a property bubble. “If solely focusing on the housing market, the central bank still has ample room to raise borrowing costs,” Su said. Recent reports signaled Taiwan’s economy is weathering the rise in its currency, helped by demand from China, its biggest trading partner. Industrial production accelerated to a three-month high in November, exports increased 21.8 percent from a year earlier and the unemployment rate fell to a two-year low. The island’s GDP increased 9.8 percent last quarter from a year earlier. To contact the reporter on this story: Chinmei Sung in Taipei at csung4@bloomberg.net. To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

Source