Mon, Jul 22, 2019 - Page 6 News List

EDITORIAL: Central banks must act independently

Central banks, including Taiwan’s, have come under pressure after dovish signals from the US Federal Reserve. Fed Chairman Jerome Powell’s remark that the US central bank was ready to act if necessary has weakened the US dollar and threatened Asia’s export-led economies. Since February, the central banks of India, Malaysia, New Zealand, Australia and the Philippines have lowered key interest rates to stimulate their economies in the face of flagging global growth. Last week, the central banks of South Korea, Indonesia and South Africa followed suit.

South Korea’s surprise move on Thursday, which marked its first rate cut since 2016 and came less than a year after a rate hike, is a warning for Taiwan’s central bank, as the two nations compete in the global electronics supply chain. Despite the US and China declaring a trade truce at the G20 summit in Japan last month, headwinds for global tech supply chains have emerged after Japan curbed exports of high-tech materials to South Korea, which might disrupt the supply chains for flat-panel displays and memory chips.

At a board meeting last month, Taiwan’s central bank left its key interest rates unchanged for the 10th consecutive quarter, with the discount rate at 1.735 percent. While economic data over the past few weeks has shown that inflation remained low, the economy was still expanding and unemployment continued to decrease, there were signs that these positive developments did not have as much of an effect as expected, showing that a global slowdown has undermined regional trade and business activity.

Whether Taiwan’s central bank eases its monetary policy depends on whether other central banks in developed economies embark on a new round of rate cuts, with the Fed being the most influential.

The US Federal Open Market Committee is likely to cut interest rates when it meets on Tuesday and Wednesday next week, as the focus of policymakers has shifted to defending a deteriorating economic outlook, and responding to prolonged trade conflicts and prospects of a broader slowdown in global growth.

The question is whether such a move by the Fed — whether it be pre-emptive to boost the US economy or the first in an extended easing cycle — would put its credibility at risk and make subsequent policies less effective.

With US President Donald Trump urging the Fed to cut interest rates, monetary policymakers need to carefully consider the reasons for a cut and whether now is the right time.

Trump might have envied his Chinese counterpart, who has complete control over China’s central bank and can use monetary policy to offset the impact of US trade tariffs. However, recent data suggest that the US economy is sound and the Fed must seriously consider whether easing is needed without bowing to pressure from the White House.

The independence of central banks worldwide has come under increasing pressure, especially since the global financial crisis of 2008-2009, as they were pushed to introduce unprecedented stimulus measures and massive bond purchases because their governments were constrained by limits to their fiscal policies.

With a rise in conflict between central banks and government officials over the past decade, central banks are increasingly in danger of losing their independence to populist politicians, as happened in India last year, and Turkey and the Philippines this year.

This story has been viewed 2331 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top