Taiwan Traders Rethink Rate Hike Path as Central Bank Hits Back

"Taiwan traders reconsider the path of rate hikes as the central bank responds assertively. This shift highlights the complex interplay between market expectations and central bank actions, shaping Taiwan's monetary policy landscape. Stay tuned for updates as the nation navigates economic challenges with strategic adjustments."

• Interest-rate swaps decline by the most since December
• Central bank hints it may not hike interest rate in June

Taiwan swaps traders are quickly dialing back bets on a sustained increase in policy rates, after the island’s central bank chief signaled that last week’s hike was a one-off.

One-year interest-rate swaps on the Taiwan dollar, a measure of traders’ expectations for funding costs, slipped by the most in over three months on Wednesday, according to data compiled by Bloomberg. That’s a sign investors are paring their bets that liquidity will tighten.

The move came after Governor Yang Chin-long said Taiwan may keep its policy rate steady at its next meeting in June if consumer-price inflation stands between 2% to 2.5%, and if other countries cut their interest rates. He said the March hike should be enough to curb price pressures.

Taiwan’s rates market, which had stayed muted throughout last year, came back to life this month after a surge in price pressures prompted the central bank to boost its policy rate to a level unseen since 2008. The hike, which was predicted by none of the economists polled in a Bloomberg survey, triggered the largest single-day advance in more than a decade in government yields and sent rate swaps to the highest since at least 2014.

The rate increase also put Taiwan’s monetary authority at odds with most major central banks, including the Federal Reserve and the European Central Bank, which are eying a pivot from policy tightening.

“The rates market is now in a wait-and-see mode,” following the recent surge and the governor’s comments, said Vince Lin, a fixed income trader at Concord Securities. “The market is still trying to find the ceiling in Taiwan’s yields.”

Inflation has been a persistent concern for Taiwanese officials. While mild by international standards, the consumer price index has risen at an annual pace exceeding 2% for much of the past three years — above the central bank’s comfort zone. Prices are expected to rise 2.2% for 2024 after a hike of power tariffs from April.

Rates Capped

Taiwan’s one-year interest-rate swaps fell five basis points to 1.675% on Wednesday, according to Bloomberg data.

Investment banks have already started advising clients to trim hawkish bets on Taiwan rates. The risk-reward is becoming more favorable for betting on a decline in rates from here, Philip Yin, a strategist at Citigroup Inc, wrote in a note.

“The front-end rates should be a bit capped now,” said Albert Leung, a strategist at Nomura International in Hong Kong. “With the market fully pricing another 12.5-basis-point hike and perhaps a bit more yesterday, it is not surprising rates come back off today.”

Sourced from Bloomberg