Sun, Jun 17, 2012 - Page 8 News List

EDITORIAL: Trilemma ties central bank’s hands

As the eurozone debt crisis deepens and global economic growth slows, Taiwan’s export-reliant economy has taken a big hit. According to the government’s latest economic data, last month’s exports declined 6.3 percent from a year earlier to US$26.1 billion, contracting for a third consecutive month on a yearly basis, with total exports during the first five months of the year totaling US$124.47 billion, down 5 percent from the same period last year.

Imports did not fare well either, dropping 10.5 percent year-on-year to US$23.83 billion last month while imports in the first five months of the year contracted 5.3 percent to US$113.85 billion from the year before. This indicates that Taiwanese businesses’ demand for imported equipment and raw materials has weakened because of declining interest in investment and is an unwelcome sign for future economic recovery.

Consequently, the government has revised downward its forecast for this year’s GDP growth six times since August last year, with the latest downgrade showing the economy is estimated to grow 3.03 percent. However, private think tanks are even more pessimistic than the government, with two of them — Taiwan Research Institute and Cathay Financial Holding Co’s research team — lowering their estimates to less than 3 percent in the past two weeks.

At a time when economic growth is stalling, Taiwan may need to implement looser monetary policies and an expansionary fiscal policy to boost business investment and revive consumer sentiment, but the nation’s central bank is facing clear obstacles to cutting policy rates.

In recent weeks, some central banks in Asia have started to ease their monetary policies in the face of the persistent debt problems in Europe and the slowing global economy. China, for instance, unexpectedly lowered its key interest rates on June 7 for the first time since 2008, while Australia’s central bank on June 5 reduced its benchmark rates for a second consecutive month.

Central banks in South Korea, Japan and India have thus far kept their interest rates flat or at low levels in case they may need to take drastic action if the global situation takes a serious turn for the worse to negatively affect their domestic economies.

Nevertheless, Taiwan’s central bank’s hands are tied.

Most economists have forecast that the central bank — which is scheduled to hold its quarterly board meeting on Thursday — will leave its policy rates unchanged for the fourth straight quarter because of concerns of potential inflationary pressure in the coming months following the government’s recent move to hike energy prices and worries about rising food prices due to crop damage during the typhoon season.

Another reason Taiwan cannot really afford to lower interest rates much more at this stage is that the central bank wants to maintain the “real” interest rate above the bank’s “neutral” level. This is because having negative “real” interest rates — when nominal interest rates are lower than the rate of inflation — would not only weaken consumer purchasing power, but also encourage households to turn away from bank deposits and look for alternative investments. This alternative tends to be real-estate investment, something the central bank is still very much concerned could have an adverse impact.

Now, attention is focused on the results of Greece’s general elections today and questions remain about the possible meltdown of the eurozone economy. Fears of further escalation of the eurozone crisis will force Taiwan to create enough leeway in the event of a global recession — triggered by a Greek exit from the eurozone if the country fails to apply the austerity measures stipulated by its international bailout agreement — and hence the central bank will have more room to cut interest rates. It is this mixture of unpredictable eurozone problems, uncertain global economic outlook and domestic inflationary worries that has the central bank’s hands tied.

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