EDITORIAL: Bracing for monetary tightening

Mon, Sep 30, 2013 - Page 8

As widely expected, the central bank last week kept its policy interest rates unchanged for the ninth straight quarter. While the bank’s latest move demonstrates policy consistency and predictability, central bank Governor Perng Fai-nan (彭淮南) appeared under no illusion that interest rates would remain low, hinting that the bank might be preparing to begin monetary tightening.

However, any change in the bank’s monetary policy will have an impact on interest income for depositors and borrowing costs for businesses and individuals. It will also affect companies’ decisions on investment, investors’ appetite for equity investment and even the government’s finances. However, the bank’s latest move makes this message clear: If it starts adjusting its monetary policy, it entails the coming of cyclical change in the economy and everyone should be prepared to adapt to the changing economic environment.

While saying the nation’s economy will grow moderately in the near term amid benign inflation and mild growth in exports, the central bank on Thursday called for caution about the combined influence of uncertainty about the US debt ceiling, the US Federal Reserve’s tapering of its quantitative easing and volatile cross-border capital flows.

In addition, members of the bank’s policymaking board are worried about the muted growth momentum in both private consumption and investment. The latest government data reinforces the bank’s assessment of weak domestic demand.

For instance, commercial sales — which include the food and beverage, retail and wholesale sectors — last month dropped for the fourth consecutive month to NT$1.18 trillion (US$40.22 billion). Last month’s decline of 0.6 percent from a year ago was bigger than the previous month’s 0.3 percent fall.

Adding to this suprisingly poor result is that industrial production unexpectedly fell 0.7 percent year-on-year last month after rising 2.08 percent in July, manufacturing production declined 0.59 percent last month year-on-year following a 2 percent increase in July and the economic monitoring indicators flashed “yellow-blue” for a second month last month, signifying a lackluster economy.

Nevertheless, it is the bank’s awareness of rising household debt that is a serious cause for alarm. As mortgage payments account for more than 30 percent of household income, the bank last week advised borrowers to be careful of potential interest rate changes in the future.

More importantly, Perng gave a candid talk at a press conference after the quarterly meeting that people should not expect interest rates to stay low forever because the Fed has signaled that it will soon start reducing its massive monthly bond-buying program and eventually bring it to an end. Mortgage borrowers have to take into account their ability to repay loans should there be any rate changes.

Reference materials provided by Perng during the press conference showed that the Federal Reserve Bank of New York on Monday last week began tests of a new tool that the US central bank may use when the time comes to scale back its massive stimulus package. The new tool, known as a reverse repo facility, has helped absorb US$6.2 billion worth of excess funds from the market to reduce the volatility of short-term rates, according to the reference materials.

One can infer that the central bank is hinting at possible monetary tightening, although no one can say for sure when or what tools it will use. Commercial lenders need to keep watchful eyes on their risk management for real-estate lending, as the latest data showed that total real-estate loans — including consumer’s mortgages and loans made by developers — have reached more than one-third of total loans. Some banks may suffer losses from bad real-estate loans in the face of a possible uptrend in interest rates.