(Bloomberg) — A surge in the Taiwanese dollar last month spurred an influx of funds, driving local money-market rates to the lowest level in more than a year and potentially delaying monetary easing by the central bank.
Taiwan’s dollar has surged 11% since the end of March, which the central bank said was fueled by “excessive” inflows from exporters and foreign investors. Meanwhile, overseas buyers poured almost NT$220 billion ($7.4 billion) into local equities in May as the benchmark index gained. That’s bolstered liquidity in the interbank market — and the highest interest rate that financial institutions pay to borrow for one week has slid to a 14-month low.
Taiwan is one of the few economies in Asia that hasn’t kicked off an interest-rate-cut cycle as the elevated inflation and heated housing market offset concerns over the impact of global trade conflicts. Since corporate borrowing costs have already eased, policy makers may have more scope to keep rates on hold in their decision this month.
“The loose condition is beneficial for corporates to get loans from banks,” so the central bank should be in no rush to cut the reserve requirement ratio, Michelle Lam, Greater China economist at Société Générale SA, said in an interview. The front-loading of exports will keep demand resilient for now, so it’s more likely to lower RRR or interest rates in December, or even next year, depending on the actual impact of tariffs.
In addition to the repatriation of funds and securities inflows, Bumki Son, an economist at Barclays Bank, noted that if the central bank wants to ease the appreciation pressure on the currency, it needs to buy the greenback and sell the local dollar in the market — which is also increasing the supply of local currencies and thereby driving market rates lower.
The monetary authority has urged trading firms to buy and sell the US dollar based only on their actual needs, and emphasized foreign investors would be violating regulations if they didn’t put their money in securities as they reported.
The central bank has stepped up efforts to mop up liquidity. The outstanding negotiable certificates of deposit climbed to a one-year high, with combined issuance in April and May amounting to some NT$630 billion, the most since 2020-2021 when a surge of the currency prompted similar efforts.
“Even if the central bank can drain funds through open market operations, it is sometimes difficult to fully absorb the excessive liquidity,” said Barclays’ Son.
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