EDITORIAL: Central bank can only do so much

Mon, Sep 26, 2016 - Page 6

Thanks to the recent launch of Apple’s new iPhones and products from other brand-name vendors, Taiwan’s exports and manufacturing production should continue to improve this month and show annual gains in what is left of this year, which would reduce the pressure on the central bank to ease its monetary policy.

Government statistics released last week indicated that export orders increased 8.3 percent last month from a year earlier to end 16 straight months of annual decline. The Ministry of Economic Affairs predicted that export orders are likely to continue rising this month, thanks to demand for new iPhones and other consumer electronics products.

Customs-cleared exports also grew 1 percent last month from a year earlier for a second consecutive month of annual increase, with the Ministry of Finance forecasting the growth momentum would persist this month and beyond in a new capital spending cycle among local tech firms.

On the domestic front, the consumer price index edged up just 0.57 percent year-on-year last month, its slowest annual gain this year, and it might take a while for the inflationary gauge to reach the central bank’s 2 percent target.

Meanwhile, the official manufacturing purchasing managers’ index (PMI) compiled by the Chung-Hua Institution for Economic Research last month reached the highest level in 16 months, while the Markit/Nikkei measure of Taiwan’s PMI hit an 18-month high in the month, lending further support to a gradual recovery in the economy.

The central bank is scheduled to hold a quarterly board meeting on Thursday. It has cut interest rates for four straight quarters, by a total of 50 basis points, since September last year, but a growing market consensus is that policymakers might be able to breathe a sigh of relief this time as the risk of deflation recedes and exports post a tenuous recovery.

The bank might also opt to stay put given the US Federal Reserve’s decision last week not to raise the cost of borrowing.

However, opinion varies about future interest rates because there is still a lot of uncertainty, such as the sustainability of iPhone-driven recovery, the strength of domestic demand, a potential Fed rate hike and prospects for global and regional growth.

Either way, the central bank’s monetary easing has approached the limits of its effectiveness, as the domestic banking system’s deposit growth has continued to outpace loan growth so far this year.

Statistics compiled by the Financial Supervisory Commission show the loan-to-deposit ratio among domestic banks stood at 72.5 percent as of the end of July, the lowest in the past 10 years, indicating that banks still have plenty of idle funds that could be used more productively. While borrowing costs remain low, publicly listed companies hold heavy cash positions, totaling NT$8.8 trillion (US$280.88 billion) at the end of June, as firms have turned risk-averse and become less willing to invest amid a gloomy economic outlook and volatile financial conditions, the commission said.

Accommodative monetary policy must be complemented with the flexible application of macro-prudential measures, expansionary fiscal policy, and, most importantly, structural reforms of the economy to help digest funds.

If the government cannot create a beneficial investment environment and foster a new model for economic development, with interest rates so low (and possibly heading lower), the large amount of surplus money in the banking system would only flow to the equity and property markets as well as other financial investment fronts.

The government must serve as a catalyst that channels funds into real production activities to stimulate growth.