Sun, Sep 26, 2010 page8

• EDITORIAL : Central bank’s crystal ball is cloudy

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  Asian central banks, including Taiwan’s, are under pressure after the US Federal Reserve announced on Wednesday that it was ready to boost the US economy by buying more government debt and pumping more money into the market. This move could maintain the rise of Asian currencies against the US dollar and threaten Asia’s export-led economies.

  Moreover, South Korea’s surprise move earlier this month to not raise its key interest rate, which many analysts thought it would, has emerged as an additional factor for the nation’s central bank to consider when its board members gather on Thursday to review the available monetary tools and decide whether to adjust the policy rates.

  At its last board meeting in June, the central bank unexpectedly raised its policy rates by 0.125 percentage points — the first rate hike since February last year — and adopted targeted credit-tightening measures to curb property speculation in the greater Taipei area. At that time, the bank’s stance appeared hawkish and analysts generally expected to see more rate hikes in the coming quarters.

  Over the past three months, while the latest economic data showed that the nation’s inflation was low, the economy was still expanding and unemployment continued to decrease, there were signs that the strength of the global economic recovery, especially in the US and Europe, was not as strong as expected.

  Against this backdrop, the US Federal Reserve, the European Central Bank and several central banks in Asia — including those of Japan, South Korea and China — have opted to freeze their key interest rates to signal their view that, for now, the world economy is not strong enough to warrant further monetary tightening.

  For Taiwan, it is likely that the central bank will raise its policy rates by another 0.125 percentage points this week to demonstrate its confidence in the nation’s economy, despite external uncertainties.

  The question is whether a move like this — ahead of similar moves by other major economies — would risk attracting more speculative capital to aggravate the threat of an asset bubble.

  On the other hand, should the central bank decide to take no new steps on Thursday, it would suggest that the bank is worried not only about the global economic recovery, but also the negative impact of a sudden surge in speculative capital inflows.

  The inflows of hot money have already pushed up both the value of the New Taiwan dollar and domestic asset prices in recent months. Therefore, the central bank could use other means to absorb the excess liquidity in the market without resorting to rate hikes, as inflation is still under control.

  At a time when the bank is fighting hard to keep the NT dollar as low as possible to beef up Taiwan’s export competitiveness, what it does not need is an increase in the interest rate to encourage currency speculation.

  Still, there is another scenario for the central bank: staying put on interest rates, but announcing more targeted credit-tightening measures to focus its heightened attention on price stability in the real estate sector.

  This, however, would still indicate the bank’s stance of keeping the value of NT dollar weak — although not theoretically reasonable or practically feasible amid a booming economy — which would make imports more expensive. In addition, this would benefit exporters at the expense of the general public and lead an increasing number of people to doubt the bank’s monetary policy.

  While the central bank is always faced with the challenge of exercising its monetary tools effectively, this time it is a tough call because of all the uncertainties that lie ahead.
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