In another sign of Taiwan’s drift toward China’s orbit, the central bank is to consider heading in the opposite direction of the US when it comes to interest rates.
Fourteen hours after what most anticipate to be the US Federal Reserve’s first rate increase since 2006, the central bank is to mull a reduction as its economy suffers amid China’s slowdown.
Economists are split on tomorrow’s decision, with 11 of 22 economists surveyed expecting Taiwan to reduce its discount rate by 12.5 basis points to 1.625 percent, with one seeing 1.5 percent and the rest expecting no change.
US futures are pricing in 76 percent odds of a hike in Washington.
Such divergence marks a departure from history, where Taiwan’s monetary policy has tended to follow the US, the final stop for many of the goods like iPhones and laptops for which the nation makes components.
The economic slowdown in China, Taiwan’s biggest customer because of interwoven supply chains, dragged the nation’s economy into a contraction last quarter.
Central bank Governor Perng Fai-nan (彭淮南) is responding with looser monetary policy and a weaker exchange rate to revive exports and inflation.
“Taiwan’s economic relationship with the US is slowly weakening, while China’s influence is getting stronger,” said Raymond Yeung (楊宇霆), an economist at Australia & New Zealand Banking Group Ltd in Hong Kong. “In Taiwan, they’re not concerned about outflows, and in fact, outflows can help weaken the exchange rate, which is what it wants to do.”
Markets have already begun to price in the policy divergence. The New Taiwan dollar has dropped 3.5 percent versus the greenback this year, nearly as much as the Chinese yuan. Bond traders are also betting on a decoupling, with five-year government notes yielding 101 basis points lower than similar US securities this month, the biggest gap since 2011.
Unlike most emerging markets, Taiwan, with the world’s fifth-largest foreign-exchange reserves and a steady trade surplus, does not need to worry about the risks of excessive outflows that come with parting ways with the Fed. Instead, policymakers’ concern might be the NT dollar’s strength. The currency, which rose to NT$33.026 against the greenback in Taipei yesterday, is emerging as Asia’s top performer this year, adding to the challenge of reviving exports, which have shrunk in the past 10 months.
From 1995 to 2009, Taiwan has followed the US in three tightening and three easing cycles, though the timing sometimes differed.
In 2010, even as US rates remained zero-bound, Taiwan began boosting the key rate from a record-low, though it never reached the same levels as before the global financial crisis. From June 2011 to September, the rate was held and liquidity remained ample.
Foreshadowing the cut last quarter, Perng said in March that Taiwan’s policy does not necessarily have to follow the US’.
China became Taiwan’s biggest export market in 2003, when it surpassed the US for the first time. Since then, China’s share of the export market has doubled to almost 40 percent. The nation’s manufacturers are grappling with the slowest Chinese growth in 25 years, as well as tougher competition from rivals across the Strait.
Asian central banks, especially those in economies dependent on Chinese demand such as Taiwan, have become more reluctant to let their currencies gain significantly against the yuan for fear of eroding competitiveness, Credit Suisse Group AG economist Santitarn Sathirathai wrote in a recent note.
The NT dollar has risen 0.5 percent against the yuan this year after two years of depreciation.
Even if Taiwan does not cut its policy rate tomorrow, it is clearly not on a tightening path. Last month it lowered the rate on 14-day certificates of deposit offered in open-market operations, helping to push the five-year government bond yield to another record-low this month.
Even some analysts that do not see a cut tomorrow, such as ANZ’s Yeung or Franklin Templeton SinoAm Securities Investment Management Inc’s Leon Chu (褚國廷), say one will come at the next meeting in March.
“Capital outflows have little impact on Taiwan’s economic stability, though of course they will hit financial markets,” said Chu, a fund manager at Franklin Templeton SinoAm in Taipei. “The central bank’s policy reference is going to move farther from the US and toward China, which has been cutting rates.”
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