Strong Dollar, Excess Cash Put Taiwan in a Bind: Decision Guide

Taiwan’s central bank is in something of a bind.

It can’t raise interest rates without further driving up the value of it’s dollar, and while cutting rates should help stem the currency’s gains, it could also exacerbate a surfeit of cash, which is already driving down yields and pushing up housing prices.

Policy makers will have to reach deep into their tool box to balance these forces, but that won’t include cuts to the policy interest rate, which the central bank is forecast to keep at a record-low 1.125% at its quarterly board meeting Thursday. Central bank Governor Yang Chin-long has repeatedly said that Taiwan has to follow the world’s major economies in easing monetary conditions, and economists expect the rate to be kept unchanged through all of next year.

Here’s a look at some of the issues facing the central bank in its final policy decision of the year:

Currency Surge

Despite the central bank’s efforts to control the local currency by intervening in foreign exchange markets, the Taiwan dollar has continued to strengthen. Surging exports and an influx of repatriated capital this year have fueled the currency’s biggest annual gain against the U.S. dollar since 2017, sending it to its highest level in 23 years and putting pressure on Taiwan’s exporters and insurers with overseas assets.

Strong Dollar, Excess Cash Put Taiwan in a Bind: Decision Guide

“The central bank won’t have many tools at its disposal that can keep the exchange rate in check next year,” said Tieying Ma, an economist at DBS Group Holdings Ltd. in Singapore.

Capital Outflows

Both Ma and Winston Chiao, an economist at Taishin Securities Investment Advisory Co., say the best way to ease the appreciation of the Taiwan dollar would be to encourage capital outflows. Chiao sees an opportunity next year for the central bank and the Financial Supervisory Commission to reduce obstacles to institutional and individual investors increasing overseas allocations.

Strong Dollar, Excess Cash Put Taiwan in a Bind: Decision Guide

Money Supply

The amount of cash in Taiwan’s markets, driven by a record-high current account surplus, is ringing alarm bells. The growth in M2 money supply between August and October exceeded the central bank’s guidance range of 6.5%. Not only is it driving down yields across financial markets, it’s fueling a concerning rise in property prices.

The monetary authority has already leaned heavily on its preferred tool for mopping up excess liquidity -- issuing short-term certificates of deposit. The value of outstanding notes is at a record and nearing NT$9 trillion ($320 billion). Taishin Securities’ Chiao sees the central bank addressing the issue by selling more longer-term one- and two-year notes next year to lock up liquidity for longer periods.

Property Prices

Policy makers will likely also implement additional measures to rein in property prices. Earlier this month, the central bank announced limits on mortgages for businesses and individuals. Both Chiao and Ma see further targeted lending restrictions on buyers as possible.

©2020 Bloomberg L.P.

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