The central bank might soon take action to rein in property price hikes and stabilize the financial system, as flush liquidity, hot money inflows and capital repatriation have pushed money supply above its target zone, Australia and New Zealand Banking Group (ANZ) said yesterday.
“We believe the central bank will begin to focus on financial stability and consider mopping up excessive liquidity and tightening property lending via macro-prudential measures,” ANZ said.
The central bank on Tuesday reported that the nations’ broad money supply measure of M2 — cash, cash equivalents, time deposits, foreign-currency deposits and mutual funds — rose 7.05 percent year-on-year last month.
The bank has set the target zone at a range of 2.5 to 6.5 percent.
The narrow measure of M1B — cash and cash equivalents — grew 12.85 percent, indicating ample liquidity in the banking system, it said.
Taiwan has attracted strong global funds and corporate capital repatriation from offshore markets, helped by a stable economic recovery and positive export outlook, ANZ said.
“Strong portfolio flows and flush liquidity present immediate challenges to policies, affecting interest rates, the foreign exchange rate and the likelihood of asset-price bubbles,” it said
The overnight interest rate has been sitting below 0.08 percent and the 10-year government bond sank to a historic low of 0.27 percent this month, ANZ said.
Land and construction financing last month rose by NT$41.8 billion (US$1.45 billion) to NT$2.37 trillion, reflecting active efforts by developers and builders to launch presale and new housing projects, the central bank said yesterday.
Against this backdrop, the central bank would focus its policy decisions on financial stability, rather than economic growth, in its policy meeting next month, ANZ said.
While the central bank would likely keep interest rates on hold, it might consider mopping up excessive liquidity and launch macro-prudential measures to curb property risks, ANZ said.
The monetary policymaker would refrain from lifting the rediscount rate, currently at 1.125 percent, as a strong policy signal might attract more capital inflows and accelerate currency appreciation, but the ultra-low interest rate would continue to motivate Taiwan’s financial institutions to invest in overseas markets, ANZ said.
Low interest margins have been a concern for Taiwan’s banking sector and other institutional investors, such as life insurance companies, that need sufficient investment returns to cover their long-term liabilities.
With this in mind, the Financial Supervisory Commission might relax investment restrictions to grant financial institutions more flexibility in pursuing better investment yields in offshore markets, ANZ said.
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