Taiwan’s sustained monetary accommodation policy could have a negative effect on the economy as low interest rates hamper the efficiency of capital allocation and weaken the ability of rate cuts to stimulate consumption and investment, some central bank board members have said.
Several board members voiced concern at a meeting in March, but all supported maintaining interest rates in the face of an economic slowdown, according to the meeting’s minutes released on Thursday.
“Nominal interest rates in Taiwan have stayed at very low levels for a long time,” one board director was quoted as saying.
The levels are so low and close to liquidity trap territory that they would render a rate cut ineffective in spurring consumption and investment if a crisis strikes, another director said.
The central bank has kept the benchmark rediscount rate at 1.375 percent for 11 consecutive quarters, citing concerns over negative output gaps and growing uncertainty abroad.
Holding rates steady would suffice in the short term given the relative calm in the global economic and financial environments, several directors said, adding maintaining interest rates would benefit small and medium-sized enterprises.
However, one director said there was a need to explore the potential structuring effects of sustained monetary accommodation on the economy, on the grounds that protracted low interest rates could hamper the efficiency of capital allocation.
The study should also focus on whether the bank has enough wiggle room if a sharper financial recession strikes, as prolonged low rates could restrain options regarding available policy tools, the director said.
The prevalence of low interest rates following the 2008 global financial crisis have dampened their potency as a monetary instrument, one director said, noting that Japan has kept policy rates low since 1992 to achieve short-term policy goals and the practice could backfire in the long run.
Local financial institutions have called for rate hikes as low interest rates have squeezed their profit margins.
Over the years, some academics have blamed the nation’s low inflation and wages on low interest rates.
Another director said that the central bank should take account of the policy options it could use to cope with uncertainties such as a financial crisis.
The central bank was founded to foster economic growth, as well as other missions such as maintaining financial stability and sound banking operations, one director said.
“The public sometimes assigns too much importance to economic growth,” the director said.
All board directors favored not changing policy rates and argued against rate cuts.
While the economy could fare worse this year compared with last year, GDP growth is expected to improve from quarter to quarter, rendering rate cuts unnecessary, another director said.
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