Taiwan’s central bank and the US Federal Reserve last week unveiled their latest monetary policies, with the central bank keeping rates unchanged for the sixth consecutive quarter, while the Fed cut interest rates for the first time since December last year.
Both moves were in line with market expectations. Interestingly, the remarks made to the media during post-meeting news conferences by central bank Governor Yang Chin-long (楊金龍) and Fed Chairman Jerome Powell were quite different, resulting in varied expectations of a lower interest rate environment in both countries.
The Fed on Wednesday lowered the target range for the federal funds rate by 25 basis points to 4 to 4.25 percent in an 11-1 vote, with newly installed Fed Governor Stephen Miran as the only dissenter pushing for a bigger 50-basis-point cut. Powell said the bank’s focus has shifted from fighting inflation to protecting jobs as hiring slows. In addition, the Fed’s updated “dot plot” graphic signaled there would be two more rate cuts by the end of this year, followed by one cut next year.
Powell described the decision as “risk management” aimed at supporting growth and employment, which showed that the Fed was not signaling the start of a rate-cutting cycle.
Therefore, expectations of deeper reductions might prove premature. Fed policymakers noted that inflation remains elevated and that tariffs imposed by US President Donald Trump still pose risks of further price increases.
The central bank at its latest quarterly board meeting on Thursday unanimously voted to maintain the discount rate at 2 percent, citing favorable trends in inflation and economic growth. Indeed, the nation’s economic growth momentum this year has significantly outperformed expectations, while real interest rates remain at moderate levels amid easing inflationary pressure from the sharp appreciation of the New Taiwan dollar against the US dollar. In other words, the central bank is under no pressure to cut rates or stimulate the economy.
However, following its board meeting, the central bank also voiced a warning on the economy next year, with Yang saying that monetary easing could become necessary if Taiwan’s semiconductor and information technology sectors are affected by the outcome of the US investigation under Section 232 of the Trade Expansion Act of 1962. Also, some non-tech industries are feeling the impact of external headwinds, including US tariff measures and persistent oversupply in China, which some market watchers believe would create scope for potential monetary policy easing next year.
The central bank has emphasized that the conditions for it to start cutting rates would depend on the growth and inflation trajectory next year, developments in US tariff policy, the Fed’s rate cut expectations and China’s economic slowdown. Nonetheless, Taiwan’s real-estate lending and stubbornly high housing prices in major cities remain a wild card, which would enable the central bank to slightly adjust credit controls in the housing market to satisfy rigid demand without having to cut rates.
Meanwhile, non-tech industries are struggling, leading to a rise in furloughed workers. Rate cuts would offer little benefit. Instead, targeted government subsidies and an expansionary fiscal policy would be necessary, as well as timely assistance to help affected sectors weather the downturn. When traditional industries, which employ a majority of the nation’s workforce, are hit by external shocks, immediate government action is warranted, as they affect wages, production, consumer purchases and overall economic momentum.
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