Taiwan Central Bank Raises Its Benchmark Rates

UNCLAS SECTION 01 OF 02 TAIPEI 001424 SIPDIS SIPDIS STATE PLEASE PASS USTR STATE FOR EAP/RSP/TC, EAP/EP USTR FOR ALTBACH and Stratford USDOC FOR 3132/USFCS/OIO/EAP/WZARIT TREASURY FOR OASIA/LMOGHTADER TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN AND NY FRB MARIA BOLIS E.O. 12958: N/A TAGS: EINV EFIN ECON PINR TW SUBJECT: Taiwan Central Bank Raises Its Benchmark Rates SUMMARY -------------- ¶1. Taiwan's Central Bank (TCB) recently raised its benchmark interest rates and substantially increased the required reserve ratio for foreign currency deposits. The TCB's actions and its statements indicating possible additional measures will likely strengthen the NT$ and drive up stock prices as interest rate gaps between NT$ and foreign currency funds will narrow and stimulate capital inflows. END SUMMARY. Interest Rates and Deposit Reserves -------------- ¶2. On June 21, the TCB raised interest rates for the 12th consecutive time over the past three years. Its benchmark interest rates increased by 0.25 percentage points to 3.125% for discounts, 3.5% for accommodations with collateral, and 5.375% for short-term accommodations without collateral, the highest over the past six years. ¶3. In addition, the TCB raised the required reserve ratio for foreign currency deposits for the first time over the past five years, up from 0.125% to 5%. TCB's Press Release -------------- ¶4. In its press release on June 21, the TCB clearly said that it will take additional actions necessary to maintain order in Taiwan's foreign exchange market. In the press release, the TCB urged mutual fund managers to advise their customers of foreign exchange risks when selling foreign currency products. During a press conference on June 21, TCB Governor Perng Fai-nan specifically said that domestic mutual funds are not worse than foreign mutual funds, and that domestic mutual funds do not involve foreign exchange risks. Responses -------------- ¶5. In response, banks increased NT$ interest rates. The Bank of Taiwan and other large local banks have decided to increase their deposit rates by about 0.06 percentage points and their lending rates by about 0.15 percentage points. Small banks will follow suit. ¶6. An increase in required reserves has increased costs for banks to take foreign currency deposits. Consequently, Mega Bank reduced deposit rates for foreign currency by 0.25 - 0.35 percentage points. Shanghai Commercial and Savings Bank lowered its interest rates by 0.25 percentage points for US$ time deposits and by 0.15 percentage points for US$ demand deposits. ¶7. Before the June 21 increase, the US$ deposit rate was 2.35 percentage points higher than the NT$ deposit rate. The TBC's June 21 increase has narrowed the gap to 2.00 percentage points. ¶8. The NT$ has appreciated against the US$, up 0.16% on June 21 and up another 0.52% on June 22 to NT$32.758 per US$. On June 21, Taiwan's stock price index rose 1.1% to 8,851.99, a seven-year high. Market corrections caused the stock price index to level off on June 22. Comment -------------- ¶9. The narrower interest rate gap will likely discourage capital TAIPEI 00001424 002 OF 002 outflows. Additional actions hinted at the TBC press release may even attract increased capital inflows into Taiwan, further strengthening the NT$ and driving up Taiwan's stock prices. YOUNG