Sun, Jan 31, 2010 page8

• EDITORIAL : Central bank must be independent

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  In recent days and weeks, the central bank has been busy refuting market rumors and media speculation that its repeated warnings on inflows of hot money and its checks on banks’ foreign-exchange transactions and forward trades have caused a decline on the stock market.

  For its part, the central bank has done what it is required to do to safeguard the nation’s economy, monetary policy and price stability in the long term, although its recent rhetoric did have a direct impact on the exchange rate of the New Taiwan dollar and indirectly on the stock market. Make no mistake, the currency markets can impact equity markets in various ways — and vice versa.

  Indeed, the growing uncertainty surrounding the world’s major economies’ monetary policies, international fund flows and exchange rates will likely lead to considerable volatility in global stock and commodity markets this year. Many investors are worried about governments potentially withdrawing stimulus measures and central banks possibly tightening monetary policy.

  The global financial crisis has not only reshaped the world’s financial system and influenced policymakers’ attitude toward financial problems, but also changed the relationships between governments and central banks.

  The announcement that US Federal Reserve Chairman Ben Bernanke would stay for a second term, the conflict between resigning Argentine central bank president Martin Redrado and Argentine President Cristina Fernandez and South Korea’s decision to send a vice minister to a central bank board meeting for the first time in more than 10 years all suggest increased political influence on central banks.

  Taiwan is no exception, although in a more subdued way.

  Like its global peers, Taiwan’s central bank will have to make a decision on when to raise interest rates and implement other credit-tightening measures to keep inflation in check, but that move will surely meet with corporate opposition, especially from property developers, who will face higher borrowing costs.

  On the other hand, the central bank also needs to pursue a monetary policy that is anti-inflationary, counter-cyclical and able to balance the needs of exporters and importers, as well as of average income earners and big business.

  The truth is, the central bank is not all-powerful and that is why economists have long supported a central bank that is independent and able to defend its credibility in the face of market and political pressure.

  An amendment to the Organic Act of the Executive Yuan (行政院組織法), approved by the legislature earlier this month, however, has raised concern about the independence of the central bank, as it stipulates that the bank is a subordinate agency under the Executive Yuan, instead of an independent institution.

  The central bank has immediately defended its independence on monetary policy issues following the amendment’s legislative passage, citing the Central Bank Act (中央銀行法).

  The track record of Governor Perng Fai-nan (彭淮南) — who has been in the post since February 1998 — shows that he is not concerned about market and political pressure, but supporters of the central bank’s independence are concerned about the long-term consequences of the amendment, especially when the central bank is under a leader other than Perng.

  Will future governments have the same respect for the central bank’s “independence” after the passage of this amendment?
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