The central bank yesterday kept its benchmark interest rates unchanged for a fifth quarter amid concerns over high unemployment and the need to boost domestic consumption and investment confidence.
The bank decided at its quarterly board meeting to leave its discount rate at a record low of 1.25 percent, the rate on collateralized loans at 1.625 percent and the rate on unsecured loans at 3.5 percent.
Contrary to market expectations, the central bank didn’t raise reserve requirements to drain the excess funds it had pumped into the banking system to cushion the nation from the global credit crunch.
Instead, “the central bank intends to issue long-term negotiable certificates of deposit [NCD] at appropriate times to contain liquidity in the financial system,” central bank Governor Perng Fai-nan (彭淮南) told a media briefing.
Perng said that measures of “quantitative easing,” an extreme form of monetary policy used to spur economic activity, had already ended, citing data showing excess reserves dropped to NT$33 billion (US$1.04 billion) last month, from NT$151.4 billion last April.
Central bank data showed that M2 annual growth has been subdued since October, with the broader monetary gauge rising an average of 5.25 percent year-on-year for the first two months of this year.
M2 money supply includes M1B, time deposits, time savings deposits, foreign currency deposits and mutual funds.
The annual growth of M1B, which includes currency held by the public and deposits, was 25.27 percent last month, lower than 26.17 percent posted in January, because of a net outflow of foreign capital and a higher base effect, data showed.
Chen Miao (陳淼), director of the macroeconomic forecasting center at Taiwan Institute of Economic Research (台經院), disagreed, however, saying the current monetary policy was a bit too loose and that selling NCDs was not a long-term solution.
“We haven’t actually achieved the type of investment that the central bank is hoping to attract by lowering interest rates, and that’s because there is too much excess liquidity in the market,” Chen said.
Others argued that the bank’s decision to keep the benchmark rate and reserve requirement ratio unchanged showed that the time wasn’t ripe for the monetary regulator to tighten credit.
“The move is in line with the international approach of quantitative easing before hiking up interest rates, which could weigh on the cost of capital,” said Liang Kuo-yuan (梁國源), president of Polaris Research Institute (寶華綜合經濟研究院).
Before China raises its interest rate or Taiwan’s unemployment rate improves, the central bank is unlikely to raise key rates, Liang said.
Kevin Wang (王凱民), an economist at Grand Cathay Securities Corp (大華證券), said he was not surprised that the central bank did not raise the reserve requirement ratio.
“It doesn’t take a board meeting consensus for the central bank to increase the ratio,” he said. “The central bank can raise the ratio whenever it finds necessary, be it tomorrow or next week.”
Perng said the central bank’s top priority was to stabilize commodity prices and financial markets.
“The bank will not sacrifice price stability for economic growth,” he said.
The central bank said inflationary pressure was still mild as the core consumer price index — which excludes vegetables, fruit, fish and energy prices — contracted 0.06 percent in the first two months of this year from a year earlier.
In light of soaring housing prices in certain areas, the central bank has adopted a series of targeted prudential measures since October aimed at stabilizing the financial market, Perng said.
“Soaring property prices in Taiwan are limited to certain areas, so we cannot adopt a blunt instrument [an across-the-broad policy] to put surging home prices in check,” Perng said.
Depending on inflationary pressures, Wang said the central bank could raise its benchmark rate in June at the earliest.
Kevin Hsiao (蕭正義), director of wealth management research at UBS AG’s Taipei branch, agreed.
“The nation’s inflation-adjusted interest rate may soon fall into negative territory, which will push the central bank to hike rates as early as June,” Hsiao said.
If the central bank hikes the reserve requirement ratio by 50 basis points to 100 basis points, it would absorb around NT$300 billion (US$7.4 billion) in liquidity, but it would have limited impact on the capital market, he said.
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