Bank won't let `hot money' hurt exchange rate: Perng

The central bank yesterday said that it won't allow any in-and-out flows of short-term capital or so-called "hot money" to speculate on the New Taiwan dollar's potential strengthening, which may end up destabilizing the nation's foreign-exchange market.

"If seasonal or irregular factors disturb the market, the central bank is ready to step into the market to maintain the dynamic stability of the exchange rate," central bank Governor Perng Fai-nan (彭淮南) told a press conference yesterday afternoon after the bank's board of directors' quarterly meeting.

The board decided to keep the rediscount rate unchanged at 1.375 percent.

It also kept the rate on accommodations with collateral at 1.75 percent and the rate on accommodations without collateral unchanged at 3.625 percent to help revive economic growth.

Low rates are also helping to keep the New Taiwan dollar from appreciating.

The exchange-rate system is one of "managed float" and, in principle, determined by market forces, Perng said, although the bank keeps a close watch on inflows of foreign capital.

He said investment banks have remitted more than US$15 billion for securities investments in the past nine months, but "some holders appeared to have left the capital as liquid NT dollars to subsequently take advantage of any upward movement of the currency."

"Based on the principle of conflict of interest, researchers at these investment banks should not have expressed any expectations to the media that the NT dollar would strengthen," Perng said.

He refused to reveal the amount of liquid NT dollars possessed by these banks, but said that "the central bank has measures to curb such speculative activities."

"The nation's economy, which is small and open, cannot afford many shocks or financial turbulence," he said.

On Monday, the NT dollar gained NT$0.253, or 0.7 percent, to close at NT$33.805 against the US greenback -- its strongest since Aug. 14 last year. The rise came amid market rumors of central bank intervention to purchase US dollars.

But the currency weakened yesterday to close at NT$33.795 -- up 2.8 percent from the end of last year -- correlating with the Japanese yen's weakening.

Perng shrugged off media reports that the central bank has recently restrained local financial institutions which have raised US-dollar denominated capital by

issuing global depository receipts (GDRs) from remitting their gains.

"The central bank always has to come up with buffers to deal with any influx of capital, which may possibly disturb the market," Perng said, adding the nation's economic stability is the priority.

Perng also defended a proposed mechanism to regulate the management of hedge funds, which he said are "highly leveraged."

He downplayed remarks made by the bank's deputy governor, Hsu Yi-hsiung (徐義雄), who told the legislature that "there's little room for Chinese yuan to float." Perng said Hsu made the comments in his personal capacity.

"The central bank has no position on foreign currencies," he said.

He downplayed concerns that the NT dollar's further appreciation will increase deflationary pressures.

"The deflationary pressures in Taiwan are minor, not persistent and widespread ones," he said.