The decision by the Central Bank of China (CBC, Taiwan's central bank) to raise interest rates for the fourth time in succession on March 31st came as no surprise, against the backdrop of a steadily expanding domestic economy and rising inflationary pressure. The CBC raised its main policy interest rate, the discount rate, by 12.5 basis points to 1.75%. The rates on accommodations with and without collateral were also raised by 12.5 basis points each, to 2.125% and 4% respectively.

In March Taiwan's consumer price index (CPI) climbed by 1.4% year on year, with prices for textiles, cooking oil, fruit, seafood and meat all rising, partly reflecting high international prices for such goods amid healthy demand from emerging markets. At the same time, political unrest in the Middle East has boosted international oil prices, which have fed into petrol and other energy costs in Taiwan. In April the CPI was up by 1.3% year on year, with core consumer prices increasing by 0.7% compared with March. The Directorate-General of Budget, Accounting and Statistics expects the CPI to rise by 2.2% in 2011, a larger increase than that of 2% predicted by the Council for Economic Development and Planning. Most Asian countries are battling much higher rates of inflation than Taiwan; South Korea's CPI, for example, has been rising by more than 4% year on year since the start of 2011, and the monetary authorities in India, the Philippines and Vietnam all raised interest rates in April owing to concerns over excessive price pressures.

One reason for Taiwan's relatively low inflation rate is the government's proclivity for fuel subsidies, which are costly in both fiscal and environmental terms. In April the government announced a three-month fossil-fuel subsidy for taxi drivers and operators of buses, coaches, ferries and trucks, which may be extended by a further three months and will result in NT$137.5m (US$4.8m) of foregone tax revenue over the initial three-month period. Since December 2010 the government has adopted a price mechanism whereby the state-owned energy company, CPC, must absorb one-half of the cost of the increase in international fuel prices, with consumers shouldering the other half. CPC also announced that it would keep prices for bottled gas and liquefied petroleum gas (LPG) unchanged in May, in line with the government's price-stability policy.

The central bank's recent efforts to manage monetary growth have been broadly successful. In the first three months of this year broad money supply (M2) increased by an average of 6% year on year, a rate that lies within the CBC's 2011 target range of 2.5%-6.5%. Less successful have been various measures to curb rampant price rises in the housing market, and particularly in Taipei, where average house prices rose by 12.2% last year to reach record levels. The government's "luxury tax" of 15% on some residential homes sold within a year of purchase, which was ratified by the Legislative Yuan (parliament) in mid-April, should help to curb property speculation, but its impact will not be felt until later this year.