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Rising NT may spur interest rate hike

The New Taiwan dollar yesterday rose to an eight-year high of NT$30.658 against the greenback on speculation that the central bank may increase borrowing costs this month, widening the interest-rate advantage on local assets over those in the US.

"Local banks are selling the US dollar, joining foreign investors," said Henry Lin, a currency trader at Shin Kong Commercial Bank (新光銀行) in Taipei. "The central bank will probably use interest-rate hikes to help fight inflation."

The expectation of positive post-election changes has been driving the rally, another analyst said.

"As both presidential candidates favor the relaxation of curbs on cross-strait business and trade, short-term capital inflows that are betting on a post-election boom will likely keep coming in," said Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院).

Central bank Governor Perng Fai-nan (彭淮南) agreed that the NT dollar's gains help contain inflation.

He told a legislative session yesterday that a rise in the nation's currency, Asia's best performer this year, has cut the cost of imported goods and may curb exports.

"We have to reach a balance between inflation and economic growth. It's a very tough job," Perng told the Legislative Yuan's Finance Committee in Taipei yesterday.

The NT dollar has advanced 5.8 percent this year against the US dollar, making exports more expensive on global markets.

Overseas shipments account for about half of gross domestic product and have been a major driver of the economy's expansion as Chinese demand compensates for the US slowdown.

But Perng also downplayed the impact of the NT dollar's recent appreciation on exporters, saying "the local currency only rose an average of 2 percent against currencies of the nation's 15 major trading partners" since other Asian currencies such as the Japanese yen weakened during the period.

Perng said moves in the currency market are generally decided by market participants.

"We'll enter to adjust the market whenever there is overshooting," he said.

The central bank has increased interest rates for 14 consecutive quarters, raising the benchmark to 3.375 percent. The bank's board next meets on March 27.

"Whether to raise interest rates or not later this month, I'll leave that to the board meeting," Perng said.

He said the US slowdown would curb demand for Asia's exports, slowing economic growth rates across the region.

Perng again urged exporters to hedge exchange risks by buying forward exchange agreements.

Perng further warned that the nation was facing imported inflation with an increase in the domestic consumer price index (CPI) of an average of 3.42 percent in the first two months of the year over the same period last year, 79 percent of which is attributed to rising imported commodities prices.
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