After a policy meeting on Wednesday last week, the US Federal Reserve said that it would forgo raising interest rates this year, after four rate increases last year, and would reduce its balance sheet to a normal size by September. The Fed trimmed its median US growth forecast for this year to 2.1 percent, compared with an estimate of 2.3 percent in December last year, and revised its inflation growth forecast downward to 1.8 percent from 1.9 percent.
The US central bank has adopted a monetary policy that is more dovish than expected, a dramatic change of heart over the past three months. The change signals that the US economy might be slowing faster than projected, and that the bank is willing to take a more relaxed attitude toward inflation over the short term.
Concerns about a global economic slowdown, Brexit and US-China trade tensions have prompted the Fed to halt for the time being a plan to normalize its monetary policy. The Fed might be setting up conditions that would allow it to act in the event of a sudden turnaround in economic growth and market sentiment. Having raised interest rates nine times since December 2015 does give the bank more leeway to cut rates.
However, other central banks will have greater difficulty rolling out monetary easing to fight an economic slowdown or a recession, as many of them, such as Taiwan’s central bank, have not yet started hiking interest rates.
In an unsurprising announcement on Thursday last week, the central bank said that it had decided to keep policy rates unchanged for the 11th consecutive quarter as the national growth outlook deteriorates amid weak external demand.
The bank cut its GDP growth forecast for this year to 2.13 percent, from a forecast of 2.33 percent in December last year, and revised its inflation growth forecast downward to 0.91 percent from 1.05 percent.
In the near term, monetary tightening appears unlikely given the current economic conditions, and, barring a technical recession — which economists define as two consecutive periods of negative economic growth as measured by GDP — the bank seems unlikely to lower interest rates.
Academics like to debate whether central banks should return real interest rates to normal levels when growth is slowing or normalize interest rates amid the growth worries that have resurfaced since the 2008-2009 global financial crisis.
Actions taken in Taiwan, the US and several other economies suggest that most monetary authorities have chosen the second route. Their dovish stance seems more appropriate in the short term — why should central banks raise interest rates now, only to have to lower them immediately afterward in response to sluggish growth?
However, as economic data point to the global economy continuing to lose steam, policymakers need powerful ammunition other than interest rates to help ease the pain of a sudden downturn. Taiwan has an even greater need for alternatives as it persistently experiences not just low economic growth, but also long-term challenges such as an aging population, weak productivity, excessive savings, low domestic investment and slow wage growth.
At a time when economic growth is stalling, Taiwan needs to implement an expansionary fiscal policy to boost business investment and revive consumer sentiment, because the central bank faces definite obstacles to steering the economy by changing its policy rates.
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