Central banks worldwide seek to maintain price stability, but their policy priorities vary by country. Some are known for their determination to tame inflation and willingness to do whatever it takes to tame it, while some explicitly avoid aggressive monetary tightening that curbs economic activity and many others tend to target approaches somewhere in between. Central banks walk a tightrope in making monetary decisions, which only highlights their varying decisionmaking styles and methods for achieving their goals.
In Taiwan, the consumer price index (CPI) last month rose 3.36 percent from a year earlier, the fifth consecutive month in which the inflationary gauge recorded an annual increase greater than 3 percent. After raising its benchmark discount rate by 25 basis points to 1.375 percent in March — the first hike since the economy recovered from COVID-19 disruptions — to curb public inflation expectations and maintain consumer price stability, the central bank in June again raised its discount rate by 12.5 basis points, while lifting the reserve requirement ratio by 25 basis points, the first increase since 2008.
Analysts expect the central bank to raise rates at its usual pace of 12.5 basis points next month and in December, amid stronger-than-expected inflationary pressure this year due to surging global energy and commodity costs. The bank’s rate hikes have partly helped stabilize consumer prices and reduced uncertainty. They also fit with local firms’ long-term development strategies and investment planning.
However, the central bank must also seek to stabilize the local currency, as a weakening New Taiwan dollar usually causes higher import prices and lends force to rising inflation. A weak local currency also hinders businesses attempting upgrades.
The NT dollar on Friday closed at NT$30.02 against the US dollar, down NT$0.029 from the previous session and marking its weakest level in two years, central bank data showed. So far this year, the NT dollar has depreciated 7.76 percent against the US dollar, slower than the yen’s depreciation of 15.68 percent and the won’s 10.34 percent fall among major Asian currencies. By contrast, the yuan has depreciated 6.35 percent against the US dollar, and the Singaporean dollar dropped 2.51 percent for the year to date.
There are two major factors driving the NT dollar’s depreciation: The US Federal Reserve’s rate hikes and asset adjustments are one factor, as the Fed’s aggressive monetary tightening has driven large-scale outflows of foreign funds from emerging markets. The other factor is more investors seeking safe-haven currencies due to rising concerns over the downside risks of the global economy. For instance, hot money has continued pouring into US dollar-denominated assets, evidenced by a 12.55 percent increase in the US dollar index so far this year.
Last week, several economists at a forum in Taipei called on the central bank to reconsider its policy tools in fighting inflation. They urged it to make stabilizing the NT dollar its top priority, with rate hikes as a secondary option. As the Fed plans about three more rate hikes before the end of the year, Taiwan’s central bank would likely follow suit to prevent a widening interest rate spread between the nations and to curb fund outflows. Even so, Taiwan cannot do anything about rising imported food and energy costs, nor central banks’ rate hikes, but local monetary policymakers can at least keep imported inflation from worsening.
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