* Says ultra-loose policy is over, policy returning to normal
* Inflation and economic growth still moderate
* Analysts don't see interest rate hikes until second half
* Policy rate kept unchanged at record low 1.25 pct
(Adds details)
By Jonathan Standing
TAIPEI, March 25 (Reuters) - Taiwan's central bank said on Thursday it is returning to normal monetary policy as the export-reliant economy shows signs of recovery, a move expected to result in an interest rate rise in the second half of the year.
The Central Bank of China stopped short of raising interest rates from the record low 1.25 percent, saying low rates would help the economy and would be adjusted at an unspecified, appropriate time.
But it signalled that it would join other Asian central banks in removing stimulus this year, though analysts say it is unlikely to do so at its next rate meeting due in June as inflation remains low and the recovery still needs support.
Analysts expect a 25-basis point rate increase in the third quarter and a a similar rise in the fourth quarter, but said the central bank could take other measures to drain liquidity from the financial system before then, such as raising banks' reserve requirements.
"Clearly the message is that it is not going to engage in outright hawkish gears with the economic recovery uneven," said Joanna Tan, an economist at Forecast in Singapore.
"The inflation risk in Taiwan remains the lowest in Asia, giving it the policy space to keep to an accommodative stance for a longer period while other regional players are embarking on the normalising path."
Last week India's central bank raised key rates in a surprise move, citing citing inflationary pressures and an improving economy. Malaysia has also lifted rates and Thailand's finance minister said on Monday that a rate rise there in April would not be a surprise.
Asia's economies have recovered faster than many developed economies, thanks in large part to Chinese demand for goods.
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For a related graphic on Taiwan rate trends, click on: http://graphics.thomsonreuters.com/310/TW_RTS0310.gif
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Recent data has pointed to a rebound in Taiwan, too, though consumer demand in its major Western export markets still appears to be weak and the island's jobless rate is at an unusually high 5.65 percent, suggesting a broader recovery will be gradual.
Orders for Taiwan's exports grew faster than expected in February, helped by strong Chinese demand for microchips, LCD screens and computers [ID:nTOE62I05Z]. Industrial output in the month rose 35 percent from the same period last year.
Central bank Governor Perng Fai-nan told a media conference after the policy review that its quantitative loose policy adopted during the global financial crisis was over.
When asked if that meant the bank would go to a neutral policy, he said "we are going back to normal monetary policy."
He did not elaborate.
A normal monetary policy would put the key interest rate at 2.25 percent or higher, according to Citibank research, implying at least 100 basis points in hikes ahead.
The central bank historically has set "normal" rates 1-2 percentage points higher than the government's forecast for annual inflation, which is 1.3 percent.
Perng did not answer when asked whether rates could rise at next meeting in June.
He said the reason why the bank left rates on hold this time was that it had already taken some liquidity out of the market through the issuance of negotiable certificates of deposit (NCDs) and tweaks to overnight lending rates.
The central bank is likely to raise rates when the CPI exceeds 2 percent for several straight months, analysts have said.