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Cablegate: Taiwan Central Bank Raises Its Benchmark Rates

VZCZCXRO2869
RR RUEHGH
DE RUEHIN #1424/01 1730836
ZNR UUUUU ZZH
R 220836Z JUN 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 5757
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3735
RUEHBJ/AMEMBASSY BEIJING 6948
RUEHUL/AMEMBASSY SEOUL 8737
RUEHGP/AMEMBASSY SINGAPORE 6935
RUEHKO/AMEMBASSY TOKYO 8883
RUEHML/AMEMBASSY MANILA 0091
RUEHJA/AMEMBASSY JAKARTA 4089
RUEHKL/AMEMBASSY KUALA LUMPUR 3773
RUEHHI/AMEMBASSY HANOI 3340
RUEHBY/AMEMBASSY CANBERRA 4544
RUEHWL/AMEMBASSY WELLINGTON 1816
RUEHHK/AMCONSUL HONG KONG 8200
RUEHGH/AMCONSUL SHANGHAI 1188
RUEHGZ/AMCONSUL GUANGZHOU 0362

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

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