Earlier this month, Global Finance magazine rated central bank Governor Perng Fai-nan (彭淮南) among the world’s best central bankers for the 10th straight year. He is the only central banker to have won an “A” rating 11 times from the New York-based magazine.
However, Perng’s monetary policy has in recent years has faced a barrage of criticism from local business leaders, financial circles and even former government officials for not being aggressive enough and lacking vision.
In the most recent instance, Taiwan Academy of Banking and Finance chairman Shea Jia-dong (許嘉棟) on Friday at a forum in Taipei praised the central bank for maintaining low inflation and safeguarding the market’s financial stability, but at the same time said the bank’s focus on maintaining a low interest rate environment and its continued effort to keep the value of New Taiwan dollar at relatively low levels have led to higher housing prices.
Shea served as central bank deputy governor from 1996 to 2000 and this is not the first time he has differed with Perng on the bank’s monetary policy. He said previously that the bank’s conservative stance on currency and interest rate policy ignored how it would hurt the profitability of Taiwanese banks.
While there are other people who have different views from Perng about what value the NT dollar should have, as well as what other sorts of monetary policy tools the bank can use to control liquidity and inflation, a more important issue that needs to be uncovered in such debates is if the central bank has flexibly adjusted its monetary policy to cope with changes to the economy.
Based on Shea’s rationale, the reason property prices moved significantly higher after the global financial crisis in 2008 and 2009 is because the central bank provided a relatively low interest rate environment to help boost the economy, which unfortunately prompted investors to move heavily into the property market in search of high returns by leveraging low interest rates.
Clearly, the real-estate sector has experienced a boom in the past few years as the economy has shown recovery, the government has reduced the inheritance tax and the US Federal Reserve’s quantitative easing has ensured ample market liquidity and indirectly led speculative capital into the property market. The question is: Did the bank respond to the investment surge with timely and efficient measures?
In retrospect, the central bank should have broadened its monitoring of consumer prices to include property prices earlier and it should have raised interest rates in addition to the use of targeted credit control measures to curb rising property prices.
During its quarterly board meeting on Thursday, the central bank kept its benchmark discount rate at 1.875 percent, where it has been since July 2011, citing concerns about lingering uncertainties in the global economy, a negative domestic output gap and mild outlook for inflation. However, at a press conference after the board meeting, Perng said that the bank’s monetary policy is currently “neutral,” suggesting that the bank might start to tighten it in the near future.
The central bank will continue to face headwinds from uneven global development and Taiwan will inevitably be affected by the shockwaves created by other major economies.
As Shea said, there are other challenges the bank faces, such as the emergence of the yuan, significant growth in e-commerce and an increased demand for innovative financial services. These eventualities require the bank to be flexible in its effort to maintain stability in consumer prices and financial markets.
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