The central bank plays an important role in Taiwan’s economy because it is responsible for interest rate and exchange rate policies, which have significant influence on local consumer prices, economic development and the financial system.
However, monetary policy is a double-edged sword. Take interest rates, for example: A significant rate hike might help contain inflation and curb speculation in the housing market, but it would also increase borrowing costs for businesses and place a higher mortgage burden on first-time home buyers. Yet an inadequate rate hike would fail to address rising prices and result in capital outflows.
In other words, whatever the central bank says or does about monetary policy, it cannot satisfy all parties. Nonetheless, policymakers are certain to face rising pressure inside and outside the central bank amid a slowing economy.
That was what central bank Governor Yang Chin-long (楊金龍) experienced at a meeting of the legislature’s Finance Committee on Sept. 29. Yang faced numerous questions from ruling and opposition party lawmakers, ranging from the New Taiwan dollar’s devaluation to continued capital outflows and from rising interest rates to the cooling housing market. Some lawmakers criticized the governor’s responses while others praised them.
However, at the previous Finance Committee meeting on Sept. 27, his response to a question from a lawmaker about what the central bank would do in case of sudden and sizeable foreign capital outflows due to US rate hikes or cross-strait tensions did raise many eyebrows.
“Impose foreign exchange controls,” is what Yang replied, although the central bank later walked back the governor’s remark, saying in a statement that some media reports had taken it out of context, and that foreign exchange management measures are enough to maintain stability in the domestic financial market. Again on Sept. 29, Yang emphasized that the bank would not impose foreign exchange controls during his time in office and reiterated that the bank had sufficient capacity to cope with capital outflows.
The governor tried hard to clarify the bank’s stance on foreign exchange controls, and clearly wanted to assure the financial market that flexible and effective monetary policy and foreign exchange management measures would be enough to stabilize the market, as they did during previous financial crises, but it became apparent that any slip of the tongue can affect investor sentiment and cause market turmoil.
Yang has faced numerous challenges since he took office in 2018, such as the COVID-19 pandemic, global supply chain disruptions, the Russia-Ukraine war, rising inflation worldwide, tensions across the Taiwan Strait, a hawkish US Federal Reserve, the strengthening US dollar and global market routs.
As the head of the central bank, Yang faces many issues that might seem simple, but are in fact complicated and interlinked. When the central bank makes decisions, the implication of its actions and the uncertainty of future developments must be taken into account. Nowhere is such a difficult situation more pronounced than in its decisionmaking, and the bank’s monetary policy cannot solve all of the nation’s economic and trade problems.
It is always difficult to judge whether the central bank’s monetary policy is good or bad, right or wrong.
However, the central bank must make decisions that conform to its policy goals, and carefully weigh the pros and cons. Its decisions must be made based on the current economic climate and market forecasts.
As Taiwan sails through the dangerous waters of continued uncertainty in the global economy, the central bank must balance risk control with prudent policy, while acting with transparency, independence and accountability.
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