Academia Sinica yesterday called on the central bank to adjust its longstanding policy of keeping interest rates low and local currency exchange rates weak, which has contributed to national economic stagnation and excessive liquidity.
The Taipei-based research body made the appeal at a news conference after releasing recommendations on how the monetary policymaker can enhance stabilization of Taiwan’s currency market and banking institutions.
“Taiwan’s economic and financial development shows stagnation and suggests significant need for reform,” the report said.
Photo: Huang Tzu-hsun, Taipei Times
The central bank in the past year has met its goal of stabilizing the local currency and financial system, but has ignored enhancing liquidity and the economy, it said.
The central bank has favored policies focusing on low interest rates and a weak New Taiwan dollar, which has been responsible for excessive liquidity, property price hikes, stagnant wages and weak banking institutions, it said.
Low capital utilization hinders the development of the financial industry, which leads to slow industrial transformation, soft economic growth and stagnant wages, it added.
The bank’s policy stance also misses opportunities for wealth creation through better use of foreign exchange reserves, the report said.
The central bank should be more transparent in its interventions in the foreign exchange market, and lend support to the creation of a sovereign wealth fund using foreign exchange reserves, it said.
The monetary policymaker should also cease profiting from the currency market, leaving currency profit activities to wealth management experts, as is the case in other countries, the report said.
The central bank should follow the US Federal Reserve in offering forward-looking guidance on inflation and interest rates to help people and corporations prepare for their impacts, it said.
“The government should rethink the status of the central bank and not treat it like a state-run enterprise,” said Li Yi-ting (李怡庭), an academician at Academia Sinica and a member of the central bank’s policy board.
“This would reduce pressure to supplement the national treasury from its operational earnings. It would require collaboration on fiscal, governmental and legislative levels to increase the central bank’s independence,” she said.
Academia Sinica’s non-binding recommendations carry weight with the government given the institution’s influence, and the report marks the first time it has weighed in so publicly on central bank reform.
The central bank issued a response later in the day, saying it has guided its policy decisions in line with the nation’s needs, which differ from those in large economies.
A stable local currency is better for a small and open economy such as Taiwan’s, whereas other economies have different needs, the bank said.
The bank denied that a lack of independence in its operations or the need to profit from the currency market, saying that supply and demand decides the value of the New Taiwan dollar.
The bank said it is not against the creation of a sovereign wealth fund, but there should be a legal foundation first and then the government can plan its budget and funding sources.
Additional reporting by Bloomberg
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