As expected, the central bank kept its policy interest rates unchanged again on Thursday, highlighting its confidence that the inflation outlook would remain benign and that the domestic economy could grow at a moderate pace in coming quarters.
Though the central bank said it would only raise its interest rates if the inflation rate increases, the chance of this is slim for the rest of the year because international raw material prices have been stable and domestic private consumption remains weak.
The headline inflation rate is forecast to increase just 1.14 percent year-on-year in the second half of the year and to 1.23 percent for the whole of this year.
It is the eighth straight quarter that the central bank decided to stay put. The dovish policy is necessary should the bank need to take hawkish action if something goes really wrong in the global economy.
Just last week, official data for last month showed that the nation’s unemployment rate fell for the third straight month to 4.06 percent, its lowest level in nearly five years, but the industrial production index continued contracting for a fourth consecutive month by 0.07 percent year-on-year. The index of economic monitoring also indicated “yellow-blue” for a record ninth consecutive time, which means a lackluster economy.
Nevertheless, two key messages from the bank’s quarterly board meeting deserve attention.
First, members of the bank’s policymaking board believe the uncertainties surrounding the global economy will continue and recovery will not keep pace with major economies. The US and Japan have seen their economies expand modestly so far this year, while European economies remain weak and the growth of China and Asian emerging economies is slower than expected.
Second, and more importantly, board members have taken note of recent turbulence in global financial markets. The US Federal Reserve’s plan to start reducing its bond purchases later this year, the liquidity problem among Chinese banks and the massive short-term capital flows around the world are all factors. The board believes this uneasy situation in international financial markets, if it persists, could cloud the prospects for the global economy.
Though speculation about the Fed’s withdrawal of its extraordinary stimulus had surfaced in recent months, the actual wind-down came earlier than expected. The aggressive monetary easing and similar actions from other central banks have caused substantial capital flows in the global financial system, especially into emerging markets such as Taiwan’s. As such, some people fear that as the US central bank withdraws its quantitative easing, other central banks will follow suit and global liquidity will dry up, negatively affecting emerging economies. Indeed, such fears did trigger sharp declines in US Treasury bond and world stock market prices days after Fed Chairman Ben Bernanke’s announcement on June 19.
While bank Governor Perng Fai-nan (彭淮南) on Thursday played down any potential impact on Taiwan’s banking system or the New Taiwan dollar exchange rate, one should not pay too much attention to his remark, but rather expect the US monetary authorities will find a solution to smooth things over. Yet Taiwan should be concerned about whether the Fed’s withdrawal will slow down the global economy and affect Taiwan’s export-reliant economy because of the recent reports that the pace of domestic growth remained weaker than expected. While the government has recently presented both short-term and long-term stimulus measures to boost domestic consumption and investment, the local economy is vulnerable to external uncertainties.
If people’s salaries are stuck at the same level that they were 16 years ago, things will not improve significantly. Expect stronger growth in the economy? Better wait till next year.