While inflation still poses a risk to their economies, central banks in Asia have started to put their monetary tightening measures on hold in the face of a global economic slowdown.
Last week, central banks in Australia, Japan, South Korea, Malaysia, Indonesia and the Philippines all decided to keep their key interest rates unchanged because they have all felt the chill from the persistent debt problems in some European countries and the slowing economy in the US.
Like its regional peers, Taiwan’s central bank uses its monetary policy tools to help maintain a balance between boosting the economy and keeping inflation in check.
That the nation’s export growth slowed sharply last month from the previous month and that domestic inflationary pressure will likely remain steady in the coming months have emerged as factors for the central bank to consider when its board members gather on Sept. 29 to review the available monetary tools and decide whether to adjust policy rates.
At its last board meeting in late June, the central bank raised its policy rates by 0.125 percentage points — the fifth rate hike since June last year — and many economists predicted at the time that the central bank would continue the same pace of rate hikes until the end of this year or early next year.
Nonetheless, while the latest economic data showed that the nation’s inflation was low and unemployment continued to improve, there were signs that the nation’s economic growth was not as strong as expected.
Last month, for instance, the government revised downward its economic growth forecast for this year to 4.81 percent from the 5.01 percent it forecast in July, and expected the economy to expand 4.58 percent next year. On Thursday, the government said exports declined 7.2 percent year-on-year to US$25.79 billion last month, which was the lowest annual growth rate since October 2009, and fell 8.3 percent month-on-month, the biggest monthly drop since January 2009.
It is increasingly likely that the central bank will keep its policy rates at current levels at the Sept. 29 meeting to demonstrate its concern about the slowing global economy and its impact on Taiwan’s export-reliant economy.
The question is whether a move like this would undermine the central bank’s effort to help widen commercial lenders’ interest rate spreads — which are the difference between the rates charged on loans and the rates paid on deposits — and therefore impact on lenders’ profitability.
At a time when the domestic banking sector is receiving only a modest boost to its thin net interest margin following the central bank’s gradual interest rate rises over the past year, what the sector does not need is a change in the central bank’s monetary policy in the direction of rate cuts.
On a positive note, the chances of interest-rate cuts are not high at the moment. Yet, neither is it likely the central bank will hike rates any time soon unless it sees external uncertainties under control.
Another variable that might also affect the central bank’s decision at the upcoming meeting is whether its move would create negative “real” interest rates — when nominal interest rates are lower than the rate of inflation — and thus weaken consumer purchasing power and pose a threat to many wage earners whose salaries remain stagnant or rise only slightly. When the economy turns less promising, no one would like to be hurt by the central bank’s monetary policy.
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