(Bloomberg) -- Taiwan’s interest-rate swaps are nearing record highs on expectations the island’s monetary authority may tighten cash levels in the banking system by once again raising the reserve ratio for banks.
Taiwan’s one-year interest rate swaps are just five basis points away from an all-time high. Swap rates bounced off a six-month low touched in mid-September, after the central bank unexpectedly raised banks’ RRR by 25 basis points, following a similar move in June.
While both of those actions were aimed at reining in the property market, the central bank’s comments on Thursday signal it remains concerned over this issue are fanning bets for further policy tightening.
“If the central bank’s focus continues to be taming the housing market — which seems like the case given its recent remarks — then more tightening cannot be ruled out.” said Sunny Yang, a trader at IBF Securities, “The market cannot let go of this worry.”
Taiwan’s economy has been resilient thanks to the global artificial intelligence boom, which in turn boosted local asset and home prices. That’s led to the island’s monetary policy diverging from its emerging Asian peers that are cutting rates amid slowing inflation.
The Central Bank of the Republic of China, as the monetary authority in Taipei is officially known, unexpectedly hiked its key interest rate in March to the highest since 2008. Housing costs in the archipelago have risen for 23 straight quarters, according to government data, the longest run on record.
“The market is still anticipating a further RRR hike as Taiwan’s central bank sounds very hawkish in curbing property prices,” said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. The spikes in Taiwan’s IRS are far bigger than those in other Asian markets as the former has not finished its tightening cycle yet, he said.
Taiwan’s one-year interest rate swap rose to 1.73% on Friday as it’s set to extend gains for the fifth straight week.
Even though Taiwan’s CPI fell below 2% in September — a level that the central bank considers favorable — it’s been above that threshold for most of this year. The central bank also raised its 2024 CPI forecast to 2.16%.
Taiwan’s core CPI pressures are running at a pace that is more than one standard deviation above the 20-year historical norm, according to Philip McNicholas, a strategist at Robeco Group Singapore. “It’s hard to ignore the impact of property prices/rents on the index given it has about 15% weighting,” he said.
“That suggests to me that CBC’s tightening cycle is not over and done with.” McNicholas said.
(Updates with swap moves in 8th paragraph.)
©2024 Bloomberg L.P.