20111002 EDITORIAL: Sailing turbulent seas together

EDITORIAL: Sailing turbulent seas together

In the face of weak global economic growth and deteriorating financial conditions, the central bank on Thursday kept its benchmark interest rates on hold as expected, ending five consecutive quarters of rate hikes. At the same time, the bank offered a cautious economic outlook for the second half of the year and the whole of next year, while also hinting that global inflation would subside thanks to falling oil and commodity prices, and saying that rampant speculation in the domestic housing market has come under control.

Before Thursday, the central bank had increased interest rates by a total of 62.5 basis points since June last year. However, the policy rates are still well below pre-financial crisis levels — the bank had lowered rates by 237.5 basis points from September 2008 to February 2009.

The main reason behind the central bank’s decision to halt its gradual interest rate hikes was a concern that after a brief rebound, the global economy is likely to drag its heels again amid persistent debt problems in Europe and renewed weakness in the US economy, a scenario that might adversely impact Taiwan’s economy.

The bank said it believed that maintaining its policy rates at current levels would help sustain the nation’s sound economic and financial development. Taiwan’s central bank is among several Asian peers that have decided to put their monetary tightening measures on hold in the face of rising downside risks in the global economy. However, Brazil’s central bank last month surprised the market by announcing that it would cut its main interest rate because of concerns over a rapid deterioration in the global economic outlook.

To central banks, the pressure of cost-push inflation has eased significantly over the past few months, but the fear of an economic slowdown looms large after recent economic data showed slowdowns in exports, export orders and industrial production as well as subdued growth in private investment. Signs of more reasons for concern for Taiwan’s economy were the Council for Economic Planning and Development’s latest economic monitoring indicators released on Tuesday, which showed a “yellow-blue” signal — the first time it has flashed this signal in 23 months — indicating that the economy is losing momentum.

However, the biggest question for the market is whether a pause in raising rates signals a temporary suspension of the central bank’s cycle of monetary tightening or the formal end of the cycle. Whether the pause raised the curtain on a new cycle of monetary easing remains to be seen, as such a drastic change is likely to undermine the central bank’s efforts to improve commercial lenders’ profitability.

The central bank did not offer a clear answer to this question last week, saying only that it would adopt a monetary policy that ensures price stability and economic growth, which is fine for the market.

What the market does not want to hear is that outside the central bank, other government policymakers have no idea about what the central bank is doing and what challenges the nation is facing. Subdued private investment, for example, requires more government effort to improve Taiwan’s investment environment and promote industrial upgrading, not just the central bank’s monetary policy.

At a press conference on Thursday, central bank Governor Perng Fai-nan (彭淮南) said Taiwan would inevitably be affected by the shockwaves created by the US and Europe, referring to the nation as a small boat sailing through turbulent global waters. Perhaps that is a message the central bank should send to other government agencies, too — when the economy is less promising, we are all in the same boat.