TAIPEI: Taiwan's June consumer prices fell by a greater-than-expected 1.97 percent from June 2008. The price drop is the biggest in nearly 40 years. Prices were driven down by falling oil and food prices, government data showed yesterday.

The Consumer Price Index (CPI) fell for the fourth straight month, each more than the previous month and each the highest since October 1970 when the CPI fell 3 percent. Meanwhile, wholesale prices fell 13.62 percent from a year earlier. That's the biggest drop on record.

Consumer prices are predicted to continue to fall in the coming months as domestic consumption remains weak and global commodities prices fall. That could see the central bank keep its rates at a record low, analysts said.

Economist Sue Annlee said the decline in CPI gives ample room for the authorities to stand by its loose monetary policy.

The Taiwan central bank kept interest rates unchanged, saying it sees stable inflation and it will adjust monetary policy accordingly to future economic conditions. It also flagged the difficulties of relying solely on domestic consumption for growth, but added that Taiwan's economy had bottomed out.

In June, the central bank kept its benchmark discount rate unchanged at a record low of 1.25 percent, its second straight pause after seven straight cuts. Central Bank Governor Perng Fai-nan has said Taiwan's economy will have to recover to pre-crisis levels before the central bank starts raising rates.

Citigroup economist Cheng Chengmount reckons Taiwan's central bank won't raise interest rates until the second half of next year.

"Many people were concerned that rising raw material prices and stock prices could cause inflationary pressure but apparently they had worried too much and it seems that consumer prices will still be at a relatively low level for a long period of time," Cheng said. He added he believes the CPI still grew on a monthly basis and the decline in June's CPI could be the biggest one this year and that was mainly due to a high base last year.

Annlee predicts Taiwan's deflationary trend will not likely sustain, since negative prices lend support to higher consumer spending. "Prices are likely to see some support as the stable rise in crude oil prices begins kicking in," said Annlee.

The government estimated that Taiwan's CPI would likely fall 0.84 percent in 2009, the weakest level since records began in the 1960s.

The CPI data came as the Taiwan dollar ended weaker at NT$32.988 to the US dollar. The stock market ended 0.23 percent lower.

China Daily/Reuters

(HK Edition 07/07/2009 page2)