With inflation trending higher in many regions of the world, central banks have tightened monetary policies. In clarifying the US Federal Reserve’s aggressive interest rate plans last week, Chairman Jerome Powell said that the bank’s priority is to reduce US inflation as quickly as possible, signaling a stronger US dollar this year and accounting for the flow of global funds to the US.
The New Taiwan dollar on Friday closed at NT$29.66 against the US dollar, or 0.51 percent lower, its weakest since June 17, 2020, central bank data showed. As of Friday, the NT dollar had so far this year depreciated 6.64 percent against the US dollar, second only to the Japanese yen’s depreciation of 11.81 percent among major Asian currencies. By contrast, the South Korean won had depreciated 6.59 percent against the US dollar, the Chinese yuan 3 percent and the Singaporean dollar nearly 2 percent over the same period.
The continued strength of the US dollar against the world’s major currencies is one factor contributing to the NT dollar’s weakness, while another is the large-scale outflow of foreign funds from local markets in response to the Fed’s rate hikes and asset adjustments.
Data compiled by the Financial Supervisory Commission show that foreign investors recorded a net fund outflow of US$6.32 billion in the first four months of the year, while Taiwan Stock Exchange data show that the outflow correlated with foreign investors selling a net NT$718.5 billion (US$24.22 billion) of local shares in the same period.
At a meeting of the legislature’s Finance Committee early last month, central bank Governor Yang Chin-long (楊金龍) said that the continued weakening of the NT dollar against the US dollar was lending force to rising inflation. On Friday, the Directorate-General of Budget, Accounting and Statistics reported that headline inflation and core inflation last month continued to gather momentum. Headline inflation rose 3.38 percent, the largest increase in nine-and-a-half years, while core inflation rose 2.53 percent, the largest increase in 13 years.
Depreciation of the NT dollar usually results in higher import prices, while contributing to a rise in the consumer price index (CPI). According to the central bank’s valuation model, the CPI rose 0.1 to 0.17 percentage points as the NT dollar weakened from NT$28 to NT$29 against the US dollar. In depreciating by nearly NT$2 against the US dollar since the end of last year, the NT dollar has resulted in the CPI increasing by up to 0.34 percent.
As the Fed plans about six more rate hikes before the end of this year, Taiwan’s central bank should accordingly raise rates to prevent a widening interest rate spread between the two nations and to curb fund outflows. The central bank tends to tighten monetary policy when it is confident that the nation’s economy is robust enough, and when it believes that businesses and households will not feel too much pressure from the higher rates. Taiwan has shown that it can absorb higher borrowing costs if the economy continues to grow as it has in the past.
While Taiwan cannot do anything about rising global energy and commodity costs, the central bank can keep imported inflation from worsening. With the competitive devaluation of Asian currencies, the continuous devaluation of the NT dollar against the US dollar benefits Taiwan’s exports, but households and local industries that purchase raw materials overseas also take a hit. At this stage, stabilizing the NT dollar is a necessity and a big challenge for the central bank.
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