The central bank on Thursday again lowered its three benchmark interest rates by 12.5 basis points. The rate cut was in line with market expectations and most economists forecast that the bank would cut rates once more later this year to support the lackluster economy amid slowing global growth.
The central bank has cut interest rates four times, by a total of 50 basis points, since September last year. The bank’s benchmark rates — a 1.375 percent rediscount rate, 1.75 percent collateralized loan rate and 3.625 percent unsecured loan rate — are only 12.5 basis points higher than those during the global financial crisis of 2008 and 2009.
As the Directorate-General of Budget, Accounting and Statistics has forecast that the consumer price index would increase by 1.09 percent this year and that it might take a while for the inflationary gauge to reach the central bank’s 2 percent target, coupled with the bank’s intention to keep the New Taiwan dollar cheap to stimulate exports, the policy rates have room to fall further.
Some economists have predicted that the bank’s benchmark rediscount rate could go below its record low of 1.25 percent seen during the global financial crisis, considering that Taiwan’s principal trading rival, South Korea, has already brought its policy rate below levels seen during the crisis.
However, the rate cut of only 12.5 basis points demonstrated that the bank was allowing itself some flexibility. It also suggested that the bank might want to save its ammunition, because there is still a lot of uncertainty, such as the US Federal Reserve’s potential interest rate hike, the increasing economic challenges in China and the negative consequences associated with the UK’s decision to leave the EU, let alone a widening output gap and other pressing domestic issues facing Taiwan.
Unfortunately, the central bank’s continued rate cuts have raised the public’s concerns about negative “real” interest rates — when the nominal interest rates are lower than the inflation rate, meaning that consumers’ purchasing power is weakening.
Another worry is that the bank’s monetary policy might have approached the limits of its effectiveness, given that liquidity in the domestic banking systems is ample and borrowing costs remain low.
The bank’s monetary easing alone can go only so far. The desired effect of re-energizing the economy will not occur unless the government carries out reforms. That perhaps was the reason central bank Governor Perng Fai-nan (彭淮南) on Thursday called for an implementation of expansionary fiscal policy to boost aggregate demand and structural reforms to make the nation less susceptible to external shocks.
At a time when the economic situation inside and outside Taiwan is more serious than ever, Academia Sinica has slashed its GDP growth forecast for the nation to 0.52 percent for this year, with a 50 percent chance of negative growth if things go wrong.
Other government agencies should also come forward with their contributions to the economy, such as debt-financed fiscal expansion plans by the Ministry of Finance or innovative, forward-looking industrial policies initiated by the Ministry of Economic Affairs.
The government has proposed several strategies, including the development of five innovative industries, a NT$100 billion (US$3.1 billion) industrial innovation and transformation fund, and an international trade and investment company with NT$10 billion in capital to revive the economy. However, it must lay out its detailed plans as soon as possible so that the strategies can be implemented.
Most importantly, the government needs to solve certain public complaints, such as the dispute between labor organizations and large corporations over days off, otherwise it will not help boost business investment and revive consumer sentiment.
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