Taiwan’s Triple-Whammy Tightening Shrinks a Measure of Liquidity

(Bloomberg) -- A triple whammy of tightening factors in Taiwan is pushing banks to scale back purchases of central bank deposits at the fastest pace on record, a sign that market liquidity is shrinking.

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Monetary policy tightening, a seasonal impact from tax payments, and an investment boom that’s drawing cash into stocks are all coming at the same time. That has cut demand for negotiable certificates of deposits and certificates of deposits issued by the central bank — a key tool to manage liquidity as onshore banks use them to store excess cash.

Banks have cut NT$416.1 billion ($12.9 billion) of purchases so far in June, the biggest monthly decline since at least 2002, when Bloomberg began tracking the data. The total amount of outstanding NCDs and CDs has fallen to around a five-year low.

“As Taiwan’s central bank sticks with a tightening stance, while the hype around local stock and foreign bond ETFs continues to attract money, banks are left with less accessible funds in hand,” said Anita Hsu, an economist at Masterlink Securities Investment Advisory.

Taiwan’s central bank increased policy rates in March and raised the reserve requirement ratio for banks this month. That, coupled with people pulling money away from saving accounts to pay taxes or invest in stocks, resulted in tighter liquidity for lenders and hurt their appetite for the NCDs, according to a central bank official who declined to be named as the person was not authorized to comment publicly.

With money market rates already ticking up and the RRR hike set to take effect next month, deposit purchases may not recover soon, the official said. An auction Wednesday of the central bank’s two-year NCDs recorded an average yield of 1.461%, the highest in more than two years.

Analysts expect the island’s short-term rates and interest-rate swaps — a measure of policy rate expectations — to rise further on the possibility that Taiwan will keep raising borrowing costs. That may mean liquidity continues to leave the system. One-year IRS reached the highest since 2014 on Friday.

“We do not rule out further tightening, via policy rate or RRR or both, if the real estate market continues to overheat,” said Ju Wang, head of greater China FX and rates strategy at BNP Paribas SA. “We look for opportunities to re-enter IRS steepeners.”

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