Tue, Jan 06, 2026 page8

• EDITORIAL: Monetary outlook for the year

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  Benefiting from Taiwan’s strong economic growth and stable inflation, the central bank at its quarterly board meeting on Dec. 18 last year kept its policy rates unchanged for the seventh consecutive quarter since its most recent rate hikes in March 2024. That was even after the US Federal Reserve concluded the year with a third straight rate cut on Dec. 10, with the benchmark discount rate remaining at 2 percent, the highest level in 15 years, and the rate on refinancing secured loans unchanged at 2.378 percent and temporary accommodations still at 4.25 percent.

  This year, the central bank’s monetary policy would remain a focus of the market. Based on messages delivered at last month’s board meeting, the central bank seems determined to follow its own path.

  Governor Yang Chin-long (楊金龍) said the bank’s monetary policy is tight, with a slight easing bias, and would use open market operations to ensure sufficient liquidity to sustain economic growth, rather than adjusting lenders’ reserve requirement ratios.

  While most experts said there is no urgency for easing monetary policy yet, given Taiwan’s still-strong business momentum, robust exports and stellar economic growth, the governor signaled that there is room to cut rates if the US’ impending tariffs on semiconductors under Section 232 of the US Trade Expansion Act of 1962 have a major economic impact.

  Apart from interest rates, the New Taiwan dollar’s exchange rate would be another focus of the market, with the local currency set to face upward pressure against the US dollar, as the nation’s macroeconomic fundamentals remain solid, the US Federal Reserve seems likely to lower rates further after the next chair is appointed and the softness of the US dollar shows no signs of improving any time soon.

  Last year, the NT dollar moved between a high of NT$29 and a low of NT$33 against the US dollar, capping the year with a 4.27 percent increase — its largest gains against the greenback in the past five years. At its board meeting last month, the central bank flagged that excess volatility or disorderly movements in the NT dollar exchange rate, driven by massive flows of short-term capital and hedging by life insurers, would have adverse implications for economic and financial stability. The bank also reiterated that it would step in to maintain an orderly market if necessary.

  In a nutshell, there is adequate leeway for the central bank to keep rates unchanged this year, while observing how the global economy evolves and what monetary policies its global peers implement. However, given Taiwan’s export-reliant economy and its greater exposure to international trade, there would be no respite whatsoever for the central bank in closely monitoring the foreign exchange market and efficiently reacting to any usual moves in the local currency. A repeat of the rapid appreciation of the NT dollar against the greenback in May last year is simply not welcome in Taiwan.

  The market volatility of last year reflected the unpredictability of political and economic changes, which had prompted governments and central banks worldwide to stay on high alert throughout the year, and Taiwan was no exception. The same scenario is likely to occur again this year, and the emergence of new technologies would continue to challenge old models or concepts of traditional economics, particularly given the rapid development of artificial intelligence (AI).

  There is no denying that AI applications for end-users still require more time to mature and downside risks exist throughout the global supply chains. The good news is that most businesses have learned to venture into this new field and investors have also sought new targets. Moreover, a consensus has formed in the market that the trend of embedding AI into daily life and production processes is here to stay.

  The main challenge for Taiwan is whether it could take advantage of the evolution of AI to pave the way for its long-term, sustainable economic growth. Although the nation’s ability to withstand external shocks has clearly improved, the question is whether the economy — as Taiwan’s exports are AI-driven and its growth sources are highly concentrated — could enter a phase of structural growth driven by AI technology cycles rather than traditional economic cycles, and create a new normal.
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