Growing concerns about inflationary pressure have recently raised questions of the central bank's monetary policy: Should the central bank continue raising interest rates rather than allow the NT dollar to grow stronger to stem inflation?
The central bank has hiked its benchmark interest rates for 13 consecutive quarters since October 2004 and is expected to increase them once again at its board meeting later this month.
But inflation remained elevated last month and the effect of continued interest rate hikes seemed to be limited.
The latest government statistics released last week showed the consumer price index (CPI) rose 4.8 percent year-on-year last month, following a 5.33 percent increase in October -- the highest single-month increase in nearly 13 years.
While the recent surge in CPI readings mainly reflects the short-term effect of higher food prices and energy costs, a rising trend in core CPI (an inflation indicator that excludes fresh fruit, vegetables, fish and energy) presents evidence of broader upward pressure on prices.
During his appearance before the legislature's Finance Committee on Thursday, central bank Governor Perng Fai-nan (
Trying to avoid the media misinterpreting his remarks on interest rates and the NT dollar, Perng decided to give a lecture on the basic monetary economics of supply and demand to reporters on Friday in the bank's press room.
He again stressed that the bank's main priority was to maintain price stability and that it would take whatever measures it deemed appropriate to achieve that goal. He said the central bank had never intended to maintain a low NT dollar in favor of exporters by buying bulks of US dollars.
The problem is that no matter what Perng says, no one believes the bank has not intervened in the foreign exchange market to manipulate the value of the NT dollar. No one.
It's understandable that Perng's remarks were aimed at assuring people that the central bank would not let inflation get out of control. It is also reasonable that Perng, like his counterparts elsewhere in the world, will never make remarks that are totally clear and transparent to the public. He would prefer people to see what the central bank has done rather than predict what it will do.
The question is whether the central bank's tightening policy has reached its optimal effect of absorbing excess liquidity in the banking system without making the price situation worse?
The growing calls on the central bank to allow the NT dollar to appreciate are theoretically appealing because doing so will help lower the price of imports.
But another challenge facing the central bank and the government is whether they are willing to see exporters hurt and to have the nation's economic growth prospects clouded ahead of the legislative and presidential elections.
It could be a wild, unwarranted guess that this potential risk to the political scenario has placed the central bank in an awkward position today.
But it is obvious that the central bank is faced with a dilemma of how to effectively exercise its monetary policy in order to boost the economy while controlling inflation.
However, this is not a problem facing Perng and his bank alone. Central banks throughout Asia are grappling with the same challenge.
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