“Our quantitative loose monetary policy has ended, and we are now resuming a normal approach,” CBC Gov. Perng Fai-nan told a news conference. The official said his bank had earlier acted to drain liquidity from the system. “It would be too late if we only started doing so now.”
According to the latest decision, the benchmark discount rate—the rate charged on loans to commercial banks—will remain at 1.25 percent. The interest rate for accommodations with collateral will stay at 1.625 percent, while that for accommodations without collateral will also hold steady at 3.5 percent.
Between September 2008 and February 2009, the central bank reduced key rates seven times by a total of 2.375 percentage points. Rates have been kept stable at historic lows five straight times by the board since March 2009.
The high unemployment and fiscal deficits faced by many countries, casting uncertainty over the global economy on its way to recovery, were among factors convincing the CBC to continue its stable approach.
While Taiwan’s exports and industrial output have improved since the fourth quarter last year, domestic joblessness still stands at a high level and growth in salaries has been limited. Private consumption has only managed mild increases, the central bank said.
The Directorate-General of Budget, Accounting and Statistics’ forecast of a rise of 1.27 percent in the consumer price index this year amounts to only mild growth, the bank added.
In order to maintain financial stability, the CBC earlier “adequately adjusted loose monetary policy” and issued more negotiable certificate deposits to alter liquidity in the banking system. Banks’ excessive reserves as a result dropped to NT$33 billion (US$1.04 billion) in February 2010 from a high of NT$154.1 billion in April 2009. The overnight interbank interest rate is also moving upward gradually.
Given mild inflation and high unemployment, the board decided to keep the key rates unchanged in order to stimulate private consumption and investment confidence.
However, Perng said his bank will issue NCDs with longer maturity when appropriate to reduce the liquidity of banking funds.
In moves to counter real estate price hikes in certain areas, the CBC has implemented targeted prudential measures since October 2009. Domestic commercial banks accordingly have changed their loan-to-value ratios, interest charges and loan grace periods against mortgages.
Since the global financial tsunami, central banks in many countries have acknowledged the need for a macroprudential policy in addition to a microprudential policy on financial management. The CBC said it will act to ensure a steady CPI as well as financial stability.
Separately, Perng rejected an economist’s accusation of CBC manipulation of the New Taiwan dollar exchange rate. “How could the NT dollar gain so much in such a short time if we manipulated the currency rate?”
His response came after C. Fred Bergsten, head of the Peterson Institute for International Economics, told the U.S. Congress that mainland China, Hong Kong, Malaysia, Singapore and Taiwan are keeping their currencies undervalued against the greenback.
“The currency rate should be decided by supply and demand in the foreign exchange market,” the CBC said, reiterating its long-standing view. “The central bank will only act to maintain forex market order if unusual or seasonal factors cause the currency to fluctuate widely.” (HML-THN)
Write to Adela Lin at adela2009@mail.gio.gov.tw