EDITORIAL: Stabilizing the New Taiwan Dollar

As inflation tended to rise in many parts of the world, central banks tightened their monetary policies. Clarifying the US Federal Reserve’s aggressive interest rate plans last week, Chairman Jerome Powell said the bank’s priority was to bring US inflation down as quickly as possible, signaling a stronger US dollar this year and taking into account the flow of global funds to the United States.

The New Taiwan Dollar closed Friday at NT$29.66 against the US dollar, down 0.51%, its weakest since June 17, 2020, according to central bank data. On Friday, the NT dollar had depreciated 6.64% against the US dollar so far this year, second only to the Japanese yen’s depreciation of 11.81% among major Asian currencies. On the other hand, the South Korean won depreciated by 6.59% against the US dollar, the Chinese yuan by 3% and the Singaporean dollar by almost 2% over the same period.

The continued strength of the US dollar against major global currencies is a contributing factor to NT dollar weakness, while another is the massive outflow of foreign funds from local markets in response to rate hikes and asset adjustments. from the Fed.

Data compiled by the Financial Supervisory Commission shows foreign investors recorded a net outflow of funds of US$6.32 billion in the first four months of the year, while data from the Taiwan Stock Exchange shows that the exit is correlated with the sale by foreign investors of a net amount of NT$718.5 billion. $24.22 billion) of local equities over 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 the continued weakening of the NT dollar against the US dollar was accentuating the rise. of inflation. On Friday, the Directorate General for Budget, Accounting and Statistics said headline inflation and core inflation continued to accelerate last month. Headline inflation rose 3.38%, the biggest increase in nine and a half years, while core inflation rose 2.53%, the biggest increase in 13 years.

Depreciation of the NT dollar generally causes import prices to rise, 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. By depreciating nearly NT$2 against the US dollar since the end of last year, the NT dollar has driven the CPI up by as much as 0.34%.

With the Fed planning about six more rate hikes before the end of this year, Taiwan’s central bank should therefore raise rates to prevent a widening of the interest rate differential between the two countries and curb outflows. funds. The central bank tends to tighten its monetary policy when it is convinced that the national economy is robust enough and that it believes that businesses and households will not feel too much pressure due to 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 can do nothing about rising global energy and commodity costs, the central bank can prevent imported inflation from worsening. With the competitive devaluation of Asian currencies, the continued devaluation of the NT dollar against the US dollar benefits Taiwanese exports, but households and local industries that purchase raw materials from overseas also suffer. At this stage, the stabilization of the NT dollar is a necessity and a big challenge for the central bank.

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