Russia’s announcement on Friday that it was lowering its key interest rate by one percentage point to 14 percent was just the latest in a string of monetary easing measures adopted by global central banks since the beginning of the year. The Russian move came after both South Korea and Thailand unexpectedly cut their interest rates by 25 basis points last week, joining more than 20 other central banks in embarking on easing policies or stimulus programs this year to boost their struggling economies.
Overall, developments in the global and domestic inflation environment amid falling oil prices have led major monetary authorities to realize that slowing economic recovery is a more immediate concern for their country this year than consumer price rises, especially when the global economy continues to grow at an uneven pace.
However, the media’s discussion over recent actions taken by global central banks has gradually turned its focus from the US Federal Reserve’s expected tightening cycle and additional monetary easing measures in Japan and Europe to a potentially intensifying currency war among major economies to maintain their export competitiveness and counter deflation.
This worry is even apparent in Asia, which has seen surprise monetary easing so far this year by central banks in countries such as China, India, Singapore, South Korea and Thailand to spur exports. However, pundits have warned that this strategy of taking advantage of weaker currencies versus others, especially if China is to join the currency war to boost exports, will generate greater market volatility and lead to a vicious cycle of further weakness in regional currencies.
The issue of the regional currency devaluation race is likely to keep pressure on most Asian policymakers this year. While an economic scenario in which further monetary easing to drive down national currencies is likely to emerge, it is the signs of weakening demand in the global economy, rather than the monetary conditions of each economy, that raises concern.
Taiwan’s central bank therefore faces challenges ahead. When members of its policymaking board meet later this month at its quarterly meeting, they will encounter the same question that critics always ask: Does the bank need to continue maintaining a low interest rate environment and keep the value of the New Taiwan dollar at relatively low levels to benefit exporters, even though such policies have led to higher housing prices in this country?
The central bank also faces a landscape unique among its regional counterparts when the quarterly board meeting takes place on Thursday next week, begging the question: Will a potential resurgence in capital inflow in view of the exodus of capital from China, Japan and even the eurozone take advantage of Taiwan’s steadily improving economy at home?
Last week, central bank Governor Perng Fai-nan (彭淮南) did not provide any policy guidance at the legislature’s Finance Committee meeting, but his remarks that Taiwan has no plans to follow the US and other nations in setting monetary policies and is to walk its own way suggests that there will be no changes in the bank’s key interest rate, which has stayed at 1.875 percent for the past 14 quarters.
Still, as Perng noted, quantitative easing measures implemented by the US, Europe and Japan over the past six years have lured quite a lot of “hot money” into Taiwan, leading the local bourse to rally 150 percent, compared with a 180 percent increase on Wall Street. Therefore, the question of how to keep hot money from destabilizing the local currency and impacting domestic asset prices will be a daunting one facing the central bank in a time of fast-changing global financial markets.
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