- About half of economists polled see second rate cut in a year
- Outflows not a concern as weaker currency targeted for exports
Here’s another sign of Taiwan’s increasing drift toward mainland China’s orbit: its central bank will be considering heading in the opposite direction of the U.S. when it comes to interest rates.
Fourteen hours after what most anticipate to be the Federal Reserve’s first rate increase since 2006, Taiwan’s central bank will be mulling a reduction as its economy suffers amid China’s slowdown. Economists are split on Thursday’s decision, with eleven of 22 economists surveyed expecting Taiwan to reduce its discount rate by 12.5 basis points to 1.625 percent on Dec. 17, one seeing 1.5 percent and the rest expecting no change. Meanwhile, U.S. futures are pricing in 76 percent odds of a hike in Washington.
Such divergence marks a departure from history, where Taiwan’s monetary policy has tended to follow the U.S., the final stop for many of the goods like iPhones and laptops for which the island makes components. The economic slowdown in China, Taiwan’s biggest customer because of interwoven supply chains, dragged the island’s economy into a contraction last quarter. Central Bank Governor Perng Fai-nan is responding with looser monetary policy and a weaker exchange rate to revive exports and inflation.
"Taiwan’s economic relationship with the U.S. is slowly weakening while China’s influence is getting stronger," said Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. "In Taiwan, they’re not concerned about outflows, and in fact, outflows can help weaken the exchange rate, which is what it wants to do."
Markets have already begun to price in the policy divergence. The Taiwan dollar has dropped 3.5 percent versus the greenback this year, nearly as much as the Chinese yuan. Bond traders are also betting on a decoupling, with five-year government notes yielding 101 basis points lower than similar U.S. securities this month, the biggest gap since 2011.
Unlike most emerging markets, the island, with the world’s fifth-largest foreign-exchange reserves and a steady trade surplus, doesn’t need to worry about the risks of excessive outflows that come with parting ways with the Fed. Instead, policy makers’ concern may be the Taiwan dollar’s strength. The currency, which rose 0.8 percent to NT$32.810 against the greenback as of 10:59 a.m. in Taipei on Tuesday, is emerging Asia’s top performer this year, adding to the challenge of reviving exports that have shrunk in the last 10 months.
From 1995 to 2009, Taiwan has followed the U.S. in three tightening and three easing cycles, though the timing sometimes differed.
In 2010, even as U.S. rates remained zero-bound, Taiwan began boosting the key rate from a record-low, though it never reached the same levels as before the global financial crisis. From June 2011 to September of this year, the rate was held and liquidity remained ample. Foreshadowing the cut last quarter, Perng said in March Taiwan’s policy doesn’t necessarily have to follow the U.S.’s.
China became Taiwan’s biggest export market in 2003, when it surpassed the U.S. for the first time. Since then, China’s share of Taiwan’s export market has doubled to almost 40 percent. The island’s manufacturers are grappling with the slowest Chinese growth in 25 years, as well as tougher competition from rivals in the mainland.
Asian central banks, especially those in economies dependent on Chinese demand such as Taiwan, have become more reluctant to let their currencies gain significantly against the yuan for fear of eroding competitiveness, Credit Suisse Group AG economist Santitarn Sathirathai wrote in a recent note. Taiwan’s dollar has risen 0.5 percent against the yuan this year after two years of depreciation.
Even if Taiwan doesn’t cut its policy rate on Thursday, it is clearly not on a tightening path. It lowered the rate on 14-day certificates of deposit offered in open-market operations in November, helping to push the five-year government bond yield to another record-low this month. Even some analysts that don’t see a cut on Thursday, such as ANZ’s Yeung or Franklin Templeton SinoAm Securities Investment Management Inc.’s Leon Chu, say one will come at the next meeting in March.
"Capital outflows have little impact on Taiwan’s economic stability, though of course they will hit financial markets," said Chu, a fund manager at Franklin Templeton SinoAm in Taipei. "The central bank’s policy reference is going to move farther from the U.S. and toward China, which has been cutting rates."