Tue, Oct 02, 2007 page12

• Perng denies propping up NT dollar

  APPRECIATION The head of the central bank told lawmakers that the primary aim in raising key interest rates was to avert higher inflation, not boost the local currency

  • By Lisa Wang / STAFF REPORTER
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  Central bank Governor Perng Fai-nan (彭淮南) said yesterday that the bank's recent interest rate hikes were not aimed at propping up the local currency or the stock market, as Taiwan's economic growth remained healthy.

  The New Taiwan dollar has gained around NT$0.5 against the US dollar since the central bank raised key interest rates for the 13th consecutive quarter on Sept. 20. The Taiwanese currency yesterday traded at NT$32.578 against the greenback.

  "The impact [of the rate increase] on the local currency is marked. Its recent appreciation has been quite drastic," said a currency trader who requested not to be named.

  "The NT dollar is gradually catching up to its Asian peers such as the Korean won and Japanese yen after the rally," he said.

  A month ago, the Taiwanese currency was the weakest among major Asian currencies, he said.

  Perng told lawmakers at a regular meeting in the legislature that the central bank's primary aim in raising key interest rates had been to curb the risk of inflation.

  Perng made the comments in response to a question from a lawmaker who asked whether the central bank had wanted to boost the Taiwanese currency and local stock market by tightening its monetary policy after the US Federal Reserve cut its benchmark interest rates by 50 basis points.

  Theoretically, a rate increase would not be a driving factor for the stock market, Perng said.

  The central bank last month raised its key interest rate by 0.125 percentage points.

  Perng said the central bank would continue to "fine tune" its monetary policy.

  The real interest rate after the adjustment was still lower than the "neutral" level which the central bank aimed to reach, he said.

  Most economists, including Citigroup Inc's chief economist, Cheng Cheng-mount (鄭貞茂), interpreted the comment as an indicator that a further mild rate increase could be in the works.

  Meanwhile, the central bank said in a report submitted to the legislature that the nation's consumer price index could rise by 2.34 percent in the second half of this year, faster than the first six months.

  The nation's economic growth is expected to expand by a moderate 4.58 percent this year in light of strong economic indicators including export orders, the report said.

  However, under pressure from lawmakers, Perng admitted that the central bank had intervened into the local currency market to stabilize the Taiwanese currency.

  "That is the job of central banks around the world," Perng said.

  He said the movement of the Taiwanese currency would be based on market mechanisms unless it were to "overshoot" because of "abnormal" factors such as a huge inflow or outflow of hot money.

  Perng refused to reveal the composition of the currency basket for the nation's foreign reserves, saying the disclosure would affect the financial market.

  Taiwan accumulated US$261.37 billion in foreign reserves in August, down sharply by US$4.92 billion from July because of an exodus of overseas fund managers from emerging markets including Taiwan, the central bank said.

  In reaction to lawmakers expressing concern about Taiwan's slide in world rankings to No. 4 in terms of foreign exchange reserves, Perng said that the nation's foreign reserves were "quite stable."

  "Taiwan's foreign reserves were more than enough" last month, he said.
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