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May 30, 2017

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Interest rate hikes loom as Yellen's QE hint sparks doubts

TAIPEI, Taiwan -- Uncertainty is expected to rise in markets worldwide following the Fed's announcement on Wednesday hinting that its quantitative easing program (QE) may finally conclude before the end of this year, with interest rate hikes likely to take place toward the middle of next year.

In her first Federal Open Market Committee meeting as the chair of the Federal Reserve, Janet Yellen stated that QE measures may conclude toward the end of this year, with the first incremental rate increase likely to be issued following a six-month lag.

Doubt is rising among investors in the Taiwan market, investors who are less assured in their previous expectations that the central bank would not raise interest rates before the end of this year. Market commentators, however, stand by their previous expectations that interest rates will remain unchanged for the eleventh consecutive month at the conclusion of the central bank's quarterly board meeting scheduled for next Thursday, with the rediscount rate remaining at 1.875 percent.

The ramifications of interest rate hikes by the Fed are widely believed to take form in large scale migration of capital back to the U.S., causing tremendous volatility and prospects of inflation to developing and regional markets worldwide. Argentina in late January showed early signs of the QE's impending end, with the Argentine peso tumbling rapidly by 16.5 percent and its foreign reserves dwindling by 44 percent while bringing the nation to the brink of default. Similarly, the TAIEX yesterday tumbled to 8,597 points while breaching the four-week average of 8,645 points.

Central Bank Warns of Specter of Housing Market

Central Bank Governor Perng had warned previously on numerous occasions that the eventual end of the Fed's QE will inevitably bring rising interest rates domestically, impacting the local housing market. Perng cautioned that monthly mortgage payments will rise by about NT$625 per every half basis point raised in the interest rate. With the nation's debt-to-income ratio reaching as high as 38 percent, Perng advised the public to take heed of volatility in long-term interest rates. Meanwhile, lawmakers had also expressed concern over the impacts of rising mortgage payments amid stagnating growth in wages.

Perng Fai-nan previously described the U.S. economy as the leading aircraft carrier in a fleet of smaller ships; smaller economies like that of Taiwan will have no option but to adjust their course in navigating the immense wake left behind by the Fed's interest rate adjustments.

The central bank is poised to take on the challenge of curbing the rampant rise in the price of consumer goods and averting the onset of negative interest rates — where the interest paid on savings deposits does not keep up with the pace of inflation, all without raising the interest rate.

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