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February, 24, 2017

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What does the US interest rate hike mean for Taiwan?

TAIPEI, Taiwan -- U.S. policymakers have voted unanimously to increase base interest rates by 0.25 percent, to between 0.5 and 0.75 percent. This marks the first rate hike this year and only the second in the past decade. We can expect more rate hikes to come in 2017, as the Fed has hinted it could raise rates at a faster pace next year. Here's a few tips for people in Taiwan.

More Savings Interest

Savers would be able to pocket a little more interest on their savings account deposits. When the Fed raises short-term rates, banks pay customers higher interest on their deposits. Rates are expected to go up, but it will take a while before savers start seeing a real difference. However, a downside to more money saved up at banks may indicate less people spending money in the local economy.

Mortgage Rates Might Rise

If rates continue to go up, it would impact interest rates for mortgages, car loans and credit cards. Most Taiwanese households devote a substantial portion of their income to pay off monthly installments, so rate hikes are a nightmare to homeowners holding debt — the rate hike decision could mean for them an annual expenditure increase of up to thousands of dollars per year. Homeowners should give serious thought to paying off that mortgage early.

Currencies across Asia Fall Against Greenback

A rising interest rate indicates a stronger currency and marks a steadily improving economy for the U.S. Demand for the U.S. dollar will grow, further driving up its strength, so those wishing to exchange money for a vacation to the U.S. are urged to act fast.

Pricier Imports

It is likely the Fed hike would drive competitive depreciation from Asian currencies, but as manufacturing equipment and raw material are sold in U.S. dollars, companies may be facing intense challenges. Meanwhile, an uptick in oil prices may result in higher prices for fuel, gas, electricity, and even designer bags and clothing.

Outflow Crisis in Emerging Markets

The Fed move would trigger more capital outflows from emerging countries, pushing down the value of local currencies. A stronger U.S. dollar would also indicate greater debt pressure for emerging markets. Investors can consider to withdraw from emerging market funds invested in local currency bonds.

Gold Prices Suffer

The rate hike sent the price of gold plunging, as rising rates tend to make gold less attractive relative to income-yielding assets. They also tend to galvanize the already-strong dollar, against which gold is often held as a hedge, so gold prices might continue to dip.

Will the Central Bank Raise Rates?

Analysts said it is not likely that the central bank will raise rates in response to the Fed's latest move. Rates are widely expected to remain the same, as the market watches on for any rate changes or possible protectionist policies under U.S. president-elect Donald Trump.

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