Central bank governor hints no local rate hike earlier than U.S. Fed’s

Taiwan's central bank governor Yang Chin-long (???) on Monday hinted that the bank will not kick off an interest rate hike cycle before its U.S. counterpart the Federal Reserve.

In a hearing held by the Legislative Yuan's finance committee, Yang said the central bank would take into account three factors as it decides when to raise interest rates, including avoiding massive foreign inflows into Taiwan on the back of any rate hike.

When asked by Kuomintang (KMT) lawmaker Tseng Ming-chung (???) about a possible rate hike in Taiwan amid market expectations that the Federal Reserve will launch similar action in July 2022, Yang said the central bank would take potential rate-triggered fund movements into consideration before implementing any changes.

Yang said when the central bank raises its key interest rates, foreign funds will flow into the country and high liquidity is expected to affect real estate, other asset prices and the Taiwan dollar's value, so long as other central banks keep their interest rates intact.

Yang's comments implied that to avoid large foreign fund inflows, the local central bank will not raise interest rates earlier than other major central banks, in particular the Fed.

The Fed has a policymaking meeting scheduled for Tuesday and Wednesday, and it is expected to announce a downsizing of its asset purchases from the market after concluding the meeting. The U.S. economy has been on a strong recovery, and so the Fed will likely start a rate hike cycle in July 2022 at the earliest.

At the last quarterly policymaking meeting held in September, the local central bank left its key interest rates unchanged for the sixth consecutive quarter, as private consumption had taken a hit amid a domestic outbreak of COVID-19.

At the conclusion of its latest quarterly policymaking meeting, the central bank retained the discount rate at 1.125 percent, the lowest in Taiwan's history.

While the Fed will start tapering by cutting bond purchases from the market soon, Yang said the impact on the Taiwan equity market could be smaller than its last tapering in 2013.

Yang said the downsizing of asset purchases in 2013 was the Fed's first tapering, but this time the Fed had learned from past experience and would carry out the tapering more smoothly.

He added that it was likely that the global markets would not see as much panic-driven selling as 2013.

Yang added that Taiwan had sound economic fundamentals, and so it was possible that some foreign funds could stay here despite the Fed's move to tighten its monetary policy.

In addition, Yang said inflation would serve as another determining factor for the central bank when considering a rate hike, but he added Taiwan has seen no inflationary pressure.

The local consumer price index rose 2.63 percent in September from a year earlier, the biggest jump in over eight years, and well above the central bank's 2 percent threshold. In the first nine months of this year, the CPI increased by an average of 1.74 percent.

However, Yang said Taiwan was not experiencing problems with port congestion like those seen in the U.S. He added that if this did push up consumer prices further, the Taiwanese government has a mechanism in place to stabilize prices.

Yang said that, compared with the U.S., it was easier for Taiwan to control consumer prices, adding that the current higher CPI could be a temporary phenomenon, given that the increase was largely due to a spike in international crude oil prices.

Meanwhile, before a decision is made on a rate hike, Yang said the central bank would need time to observe the effects of the government's measures to stimulate the economy, which were implemented in the wake of the domestic COVID-19 outbreak in mid-May.

Source: Focus Taiwan News Channel