The governor of Taiwan’s central bank, Yang Chin-long (???), said on Wednesday it was unnecessary for the bank to closely follow the moves of the U.S. Federal Reserve in the current rate hike cycle.
At a hearing held by the finance committee of the Legislative Yuan Wednesday, Yang said the central bank would consider all factors that would affect the domestic economy and financial market when it adjusts its monetary policy in reply to a question about whether the local central bank would increase its key interest rates in the same manner as the Fed.
In a quarterly policymaking meeting held on March 17, the central bank surprised the market by announcing it would raise its key interest rates by 25 basis points after the Fed kicked off a rate hike cycle a day earlier by increasing interest rates by the same amount.
It was the first time that the central bank has raised interest rates in more than 10 years. After the rate hike, Taiwan’s discount rate has now risen to 1.375 percent from a historic low of 1.125 percent, while the rate on accommodations with collateral was increased to 1.75 percent, and the rate on accommodations without collateral was raised to 3.625 percent.
In the past, the central bank only implemented gradual rate adjustment measures regardless of what the Fed had done.
Due to growing inflationary pressure, the Fed has hinted that after the March rate increase it could implement six more rate increases for the rest of this year.
With the consumer price index hitting a 40-year high of 8.5 percent in the United States in March, there are expectations in the market that the Fed will raise its interest rates by 50 basis points in the next policymaking meeting scheduled for May.
Compared with the U.S.’ skyrocketing CPI growth in March, Taiwan’s CPI rose by 3.27 percent from a year earlier, which was the highest since September 2012, when the index grew by 3.42 percent.
While Taiwan’s central bank has started to tighten its monetary policy, “it is unnecessary for the bank to adopt the same rate hikes as the Fed,” Yang said.
“When it adjusts its monetary policy, the central bank will closely monitor the development of domestic COVID-19 cases, local consumer prices, changes in global raw material supplies, monetary policies of other economies, the [Ukraine] geopolitical crisis, and the world’s financial conditions,” Yang said.
“The central bank will certainly adopt an appropriate monetary policy to fulfill its duties as required by the law to stabilize the local financial market and support the domestic economy,” Yang said.
Yang emphasized that the central bank’s directors and supervisors did not discuss in the March meeting how far the bank’s rate hike cycle would go this year.
The governor said that after the rate increase in March, he reminded many enterprises to adjust their financial plans and these companies have adapted to rising deposit and lending rates in the local market.
“The central bank will remain prudent in tuning its monetary policy,” Yang said.
In a recent research report, Singapore-based DBS Bank predicted that Taiwan’s central bank will raise interest rates by 12.5 basis points once every quarter for the rest of 2022 with the tightening likely to continue into 2023.
Commenting on a weaker Taiwan dollar at a time when foreign investors have been moving their funds to U.S. dollar denominated assets in the wake of a strengthening greenback, Yang said the depreciation of the local currency was unlikely to boost inflationary pressure too much.
Before falling slightly to NT$29.086 on Wednesday, the U.S. dollar rose to an 18-month high of NT$29.145 against the Taiwan dollar on liquidity flight. At the end of 2021, the greenback stood at NT$27.690 against the Taiwan dollar.
Citing a model, Yang said when the U.S. dollar rises to NT$29 from NT$28, the local CPI will rise by only 0.1-0.17 percentage points. “Such an increase (in the CPI) is mild.” He said the local CPI growth is likely to moderate after the third quarter.
Compared with other regional currencies, Yang said the Taiwan dollar appeared relatively stable but the central bank would step in to prevent volatility of the local currency if necessary.
Taiwan’s foreign exchange reserves ended a seven-month rising streak at the end of March to fall to US$548.77 billion as the central bank jumped into the market by selling U.S. dollars to cap the losses suffered by the Taiwan dollar.
Yang said he expected the Taiwan dollar’s weakness to be temporary.
Source: Focus Taiwan News Channel