A triple whammy of tightening factors is pushing banks to scale back purchases of central bank deposits at the fastest pace on record, a sign that market liquidity is shrinking.
Monetary policy tightening, a seasonal impact from tax payments, and an investment boom that is drawing cash into stocks are all coming at the same time.
That has cut demand for negotiable certificates of deposits (NCDs) and certificates of deposits (CDs) issued by the central bank — a key tool to manage liquidity as onshore banks use them to store excess cash.
Photo: Ann Wang, Reuters
Banks have cut NT$416.1 billion (US$12.85 billion) of purchases so far this month, 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 about a five-year low.
“As Taiwan’s central bank sticks with a tightening stance, while the hype around local stock and foreign bond ETFs [exchange traded funds] continues to attract money, banks are left with less accessible funds in hand,” Masterlink Securities Investment Advisory (元富投顧) economist Anita Hsu said.
The central bank increased policy rates in March and on June 13 said that it would raise the reserve requirement ratio (RRR) for banks next 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, said 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 reserve requirement ratio hike set to take effect on July 1, deposit purchases might not recover soon, the official said.
An auction on Wednesday of the central bank’s two-year NCDs recorded an average yield of 1.461 percent, the highest in more than two years.
Analysts expect short-term rates and interest rate swaps (IRS) — a measure of policy rate expectations — to rise further on the possibility that the central bank would keep raising borrowing costs.
That might mean liquidity continues to leave the system. One-year IRS yesterday reached the highest level since 2014.
“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 (王菊), head of greater China forex and rates strategy at BNP Paribas SA. “We look for opportunities to re-enter IRS steepeners.”
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