Experts yesterday agreed that the possibility of the central bank increasing interest rates at its board meeting on March 25 remained low, as the economy continues to recover.
“The central bank’s top priority is to drain excess liquidity in the banking system, so there is little chance the policy rate will be raised until the third quarter at the earliest,” Cheng Cheng-mount (鄭貞茂), head economist at Citigroup Taiwan Inc, said during a seminar on global monetary policies.
Cheng compared raising interest rates to “removing gauze on a wound,” saying that pulling the plug on stimulus measures too fast following the global financial crunch ran the risk of derailing the economic recovery.
With the current-account surplus and net inflows into the financial account both hitting an all-time high last year, Cheng said the toughest task for the central bank this year would be resolving the imbalance of international payments.
“The balance of negotiable certificates of deposit [NCD] issued by the central bank continues to reach record highs, indicating that Taiwan is facing a problem of [excess] liquidity,” Cheng said.
Chunghwa Post Co (中華郵政) has a loan-to-deposit ratio of only 62.7 percent, which means that one-third of the nation’s capital remains in the banking system, he said.
“If banks do not expand their credit, it will put a damper on long-term economic development,” Cheng said.
Also speaking at the seminar, Thomas Lee (李桐豪), a finance professor at National Chengchi University, said he did not expect the central bank to raise the discount rate at the coming board meeting.
“The central bank will not make a move before it is certain about US monetary policies,” Lee said.
However, it is important to keep an eye on whether the central bank raises the reserve requirement ratio, he said.
The central bank has yet to respond to a report by the Chinese-language China Times newspaper on Monday predicting that it would raise the reserve requirement ratio by between 0.75 percentage points and 1.25 percentage points.
“This could be viewed as indicating the central bank’s attitude toward a possible hike in the reserve requirement ratio,” Lee said.
He said the annualized rate of the consumer price index also deserved particular attention, because rising commodity prices might have political implications and force the central bank to restrict credit earlier.
Shea Jia-dong (�?�), chairman of the Taiwan Academy of Banking and Finance and a former deputy central bank governor, expressed the same view as Lee, saying the government should not overlook the gravity of rising consumer prices.
“Factors that used to stabilize consumer prices have changed. In the past, cheap labor and products from China had little impact on global commodity prices, but the labor crunch in China and its growing environmental concerns have led to high manufacturing costs,” Shea said at the seminar.
Shea said banks preferred to buy NCDs because they offer higher interest rates. Central bank data shows that the interest rate for NCDs is between 0.57 percent and 0.71 percent, as opposed to a rate of zero on reserves the banks are required to hold with the central bank.
Meanwhile, Ray Chou (周雨田), a research fellow at Academia Sinica’s Institute of Economics, said that although the economy had apparently rebounded, the economic recovery was in effect very fragile because unemployment remains high.
“If the central bank makes any hasty moves in the area of monetary policy [for example raising the policy rate] at the moment, that might create the risk of a hard landing for the economy,” Chou said.
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