There are growing risks stemming from the current monetary policies of the world’s major economies; on the one hand interest rate increases expected from the US Federal Reserve later this year, while on the other there have been continued or renewed accommodative monetary policies by Japan and the European Central Bank.
Against this backdrop, global financial markets could face challenges in the second half of the year that might affect Taiwan’s financial stability, the central bank warned on Friday last week.
Apart from the diverging monetary policies of major economies, these challenges include a weaker-than-expected recovery in the global economy, a slowdown in China’s economy and the gradual rebound in global crude oil prices, according to the bank’s annual Financial Stability Report.
While the central bank said in the report that for the time being domestic financial markets are still evolving and the health of financial institutions remains sound, it suggested that the nation should be prepared for a more difficult environment if the challenges materialize. Overall, the bank is worried that major economies might not return to more traditional monetary policy in the short term, while showing heightened concern over the potential for a disorderly emergence of global imbalances.
The annual report is the ninth since 2008. It includes the central bank’s review of the nation’s economic development and financial system performance over the past year, as well as foreseeable risks. The international spillover of the US exiting from unconventional monetary policy remains a major threat, it said.
Coincidentally, just three days prior to the release of the report, central bank Governor Perng Fai-nan (彭淮南) told former US Federal Reserve chairman Ben Bernanke at a meeting in Taipei that the spillover effect of quantitative easing by advanced economies has disrupted global financial markets in the form of real-estate and financial-asset bubbles, seen in small and open economies such as Taiwan, Singapore and Hong Kong. Perng said central bankers in developed economies should take more responsibilities to promote economic stability on a global scale, rather than printing money to boost economic growth or evade debt crises.
Making a similar argument was Reserve Bank of India Governor Raghuram Rajan, who said in a speech to the Economic Club of New York on May 19 that unconventional monetary policy adopted by advanced economies had sent a rush of funds into developing economies and posed great risks to the world’s sustainable growth.
Rajan warned of financial sector risks when unconventional policies end.
This year, the global economy has been resilient despite sporadic corrections and volatile swings in financial markets. However, downside risks have increased following a slew of downbeat economic data from around the world, and policymakers in both advanced and emerging markets face renewed challenges in ensuring balanced global growth and financial stability.
In Taiwan, major financial companies reported record earnings last year, but there are risks hampering growth prospects this year, such as the probability of faltering global growth and a disorderly readjustment of global funds against market volatility and geopolitical turmoil. In the first quarter, the sector’s loan growth had slowed to 3.6 percent year-on-year on offshore lending slowdown due to both monetary easing by Beijing and concerns among Taiwanese regulators over their exposure to China.
With ample foreign-exchange reserves, Taiwan should not to rely on external financing for economic development. However, the poor showing in recent economic data is still a reminder of the importance of improving the nation’s macroeconomic policies, bolstering infrastructure development and pushing forward structural reforms to avoid the fallout from any financial market correction.
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