Taiwan’s central bank governor has a tough balancing act to pull off in his first interest rate decision since renewing his term in office.
(Bloomberg) — Taiwan’s central bank governor has a tough balancing act to pull off in his first interest rate decision since renewing his term in office.
Governor Yang Chin-long must grapple with inflation that remains uncomfortably high, an economy that’s contracting, a still hawkish Federal Reserve, and global financial markets in turmoil.
Most economists surveyed by Bloomberg — 19 out of 24 — expect he will lead the bank’s policy committee in keeping the benchmark rate unchanged at 1.75% on Thursday. The remaining five see a 12.5 basis-point hike to 1.875%.
“External headwinds and the global tech cycle downturn will continue to drag Taiwan’s economy,” said Gary Ng, a senior economist at Natixis SA. “Even though inflation may be sticky in the short run, the central bank will need to consider keeping interest rate on hold as the real economy simply cannot stomach it.”
Over the five years of his first term, Yang had to contend with increasingly fierce competition between the world’s two largest economies — Taiwan’s biggest trading partners — volatility in the technology sector, and an unprecedented worldwide pandemic.
His second term, which began in February, is proving to be just as challenging. The Fed’s aggressive tightening has fueled currency instability as investors shifted funds back into higher-yielding US assets. Smaller economies like Taiwan were forced to hike rates to keep pace with the Fed and stem weakness in their currencies.
Yang oversaw four rate increases last year. He only changed rates once previously in the 20 policy meetings he’s presided over as governor since 2018 — lowering it to a record low of 1.125% in the early days of the pandemic in 2020.
The latest crisis in global banking only adds to the uncertainty the central bank has to navigate — coming on the back of a weak domestic economy as tech exports continue to slump.
Yang has previously said that for a small, open economy like Taiwan’s, “a rate hike in the US is a rate hike for Taiwan.” He favors import duties and caps on fuel and power prices as more effective ways of managing inflation.
The majority of economists surveyed by Bloomberg see no more changes in Taiwan interest rates this year. Much will depend though on the Fed’s path and the outlook for inflation.
“While a pause in hikes is entirely possible as a result of the darkening economic outlook, core inflation remains uncomfortably high and would be on the minds of the Taiwan central bank as they convene to look at the economic situation,” said Heron Lim, an economist at Moody’s Analytics.
–With assistance from Cynthia Li.
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