Central bank Governor Yang Chin-long (楊金龍) last week hinted that the bank is in no hurry to adjust key interest rates, as it continues to base its decisions on data and has not seen any significant change in economic conditions.
If the bank’s board at its quarterly meeting on March 21 maintains its stance, that would mark 11 consecutive quarters without any change to the bank’s policy rates — the rediscount rate, the rate on accommodations with collateral and the rate on accommodations without collateral.
Economists expect no rate changes this year and next, considering an economic slowdown and relatively low inflationary pressure, but the inevitable question is: Will low interest rates support or weaken the economy in the long run?
Prior to the latest economic slowdown, there was speculation that the central bank would normalize its monetary policy and absorb excess liquidity in the banking system, which has expanded steadily since the 2008-2009 global financial crisis.
However, the bank now appears to have joined many of its global peers in postponing efforts to return real interest rates to their normal levels amid growth worries.
The European Central Bank last week said that eurozone interest rates would be kept at near-historic lows until the end of the year, while it would offer ultracheap loans to banks to prevent a continued downturn and rising uncertainty from hurting the region.
The US Federal Reserve in December 2015 started its first tightening cycle in more than a decade, after years of ultra-accommodating monetary policy. That was followed by a wave of monetary normalization by other central banks attempting to prevent asset-price bubbles. However, after nine interest rate hikes as of December last year, the Fed appears to have turned more dovish, with financial market pressures in the last quarter of last year proving the turning point for its rate-hike stance.
Since then, the Reserve Bank of Australia and the Bank of England have paused their normalization cycles, while the Bank of Japan has said that it would continue its accommodative monetary policy and the Reserve Bank of India unexpectedly cut interest rates last month to boost the economy.
In the meantime, the People’s Bank of China has continued to cut tax rates and lower reserve requirement ratios for banks as China’s economy slows.
The central banks’ cautious attitudes suggest that growth in the world’s major economies is experiencing a synchronized slowdown with no clear bottom in sight; some economies even face the risk of a recession. However, the persistence of low interest rates raises the question of whether the situation is the new normal and when the low-rate era might end.
There are also other concerns. Low rates benefit businesses, but disadvantage savers. If the narrower net interest margins received by banks harm profitability and capital in the long term, they could reduce lending, leading to weaker productivity growth for businesses and affecting the economy.
In this regard, there is reason to doubt whether low interest rate policies to boost the economy are justifiable.
Last week, Yang said that interest rates would rise if household income increases, inflation climbs, inbound investments increase steadily and the economy sees sustained growth. However, he stopped short of offering a timeframe.
At this point, still-weak economic growth is probably the largest hurdle for rate hikes by the central bank in the near future. However, over the longer term, lower rates discourage household savings and reduce returns for pensioners in an economy where the population is aging at an alarming rate.
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