The central bank kept its benchmark policy rate unchanged at a record low of 1.25 percent for a fifth consecutive time at its quarterly Monetary Policy Committee meeting on March 25.
It also kept interest rates on both secured and unsecured loans steady at 1.625 percent and 3.5 percent, respectively. In their post-meeting press comments, policymakers cited uncertainties about the global recovery, relatively mild domestic inflationary pressures and the high unemployment rate as the reasons for the decision. They reiterated that the current policy is necessary to support the recovery.
The central bank did not hike the reserve requirement ratio as many had expected, despite signaling earlier that it intended to drain excess reserves from the banking system.
However, it did keep open the option of issuing long-dated Negotiable Certificates of Deposit in case it was necessary to drain reserves.
Policymakers do appear concerned that any reversal of the policy stance would have an undesirable impact.
This is a clear indication that the central bank will stay with a pro-growth monetary stance until the recovery becomes broad-based.
There are signs of a slowdown in momentum, however.
For example, the leading indicator index has slowed for six straight months on a six-month-change basis, indicating that the current growth rebound is likely to ease in the second quarter this year.
Recent export data have shown a rebound largely on the back of strong demand from China, while the recovery in exports shipments to the US and Europe has been sluggish.
Given Taiwan’s reliance on external demand, there is concern about the sustainability of the current recovery.
The relatively large labor resource gap — ie, the difference between the current and “natural” rate of unemployment — is likely to be another factor keeping the CBC on hold. Although the country’s unemployment rate fell to a one-year low of 5.65 percent this past February, it is still significantly higher than the 4 to 4.5 percent range before the financial crisis.
Moreover, much of the recent improvement came from tech firms increasing hiring during the Lunar New Year.
Therefore, we expect the unemployment rate to flat-line in the second quarter, especially as tech producers gradually fill their manpower requirements for the year.
Tony Phoo is a Standard Chartered economist based in Taipei.
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