Taiwan Keeps Rate at Record Low as U.S. Turns Up Currency Heat

Taiwan’s central bank left its benchmark interest rate unchanged, as expected, with the focus shifting to the local dollar after the U.S. put the island economy back onto its watch list of potential currency manipulators.

The central bank left its key rate at a record-low 1.125%, according to a statement Thursday, in line with all 30 estimates in a Bloomberg survey of economists.

The strength of the Taiwan dollar represents a thorny dilemma for policy makers in Taipei. Despite the central bank’s efforts to slow its rise, the currency has appreciated 3.3% versus the U.S. dollar over the past three months, hitting its strongest level in 23 years last week. That’s hurt exporters in the trade-reliant economy and hit financial institutions with overseas assets.

In its currency manipulator report Wednesday, the U.S. Treasury cited Taiwan’s growing current account surplus as the prime reason for its inclusion on the list and urged the central bank to allow the Taiwan dollar to appreciate further.

Taiwanese officials have disputed the criteria used by the Treasury in its assessment, arguing that the increased trade surplus is mainly due to rising U.S. demand for Taiwan’s technology products caused by the Trump administration’s trade war with China.

Governor Yang Chin-long also took issue with U.S. estimates of the size of Taiwan’s currency intervention in the Treasury report.

“We are the ones who are smoothing the markets. We’re the ones with firsthand knowledge. Our numbers should be the ones that count,” he said at the briefing Thursday. “We have told U.S. their estimates are wrong.”

Taiwan’s inclusion on the watch list won’t have too much an impact on the central bank’s policy of managing the currency, according to Nataxis economist Gary Ng.

“The exchange rate doesn’t affect Taiwan’s export competitiveness as much as it did before,” he said in a telephone interview. “So if the central bank tries to defend certain levels for the Taiwan dollar in the future, I don’t think it will have much impact on the economy.”

An additional headache for the central bank is the high levels of liquidity in financial markets, which is driving down yields and pushing up housing prices. The growth in M2 money supply between August and October exceeded the central bank’s guidance range of 6.5%.

Policy makers will likely keep rates unchanged through 2021, according to a Bloomberg survey of economists this month..

©2020 Bloomberg L.P.

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