20120624 EDITORIAL: Central bank controls facing hurdles

EDITORIAL: Central bank controls facing hurdles

Like many other central banks in Asia, Taiwan’s central bank has decided to keep its policy interest rates unchanged. During his press conference on Thursday last week, central bank governor Perng Fai-nan (彭淮南) said holding interest rates at current levels would help maintain stability in both domestic consumer prices and in the financial markets.

It is the fourth straight quarter that the central bank has decided to hold its policy rates at their current low levels. The conservative policy is necessary in case the central bank has to take aggressive action if something really goes wrong in the eurozone.

There are two key messages from the central bank’s quarterly board meeting last week: First, members of the bank’s policymaking board believe the domestic economy may continue to grow only modestly as the pace of US economic recovery has slowed and China’s economic growth momentum has weakened while Europe’s debt problems persist.

Last week, government data showed that the nation’s industrial output contracted 0.21 percent year-on-year last month, marking a third straight month of decline, with total output in the first five months of the year contracting 3.16 percent from the same period last year, while export orders also fell 3.04 percent last month from a year earlier to US$36.47 billion, contracting for a third consecutive month on a yearly basis, with total orders during the first five months dropping 0.55 percent to US$176.37 billion.

According to the bank’s statement on Thursday, the monetary authorities acknowledge that the deteriorating external situation is adversely impacting domestic investment and private consumption. While the central bank may hope low interest rates will benefit Taiwan’s businesses and encourage consumers to spend, one has to wonder whether its board members understand that low interest rates mean less interest income for savers and that stagnant salaries have become the main drag on consumer spending.

Nevertheless, it is the bank’s second message that has really raised people’s eyebrows: The bank has decided to expand its selective credit-control measures, especially controls on loans for luxury housing.

The bank implemented the measures to curb property speculation in selected metropolitan areas, but the bank’s decision to impose stricter credit controls on loans for luxury housing — because some banks’ loan-to-value ratios have been too high, while mortgage rates have been rather low — signaled the bank’s growing concern over the deterioration in bank assets and Taiwan’s long-term financial stability.

To avert such potential risk, beginning on Friday last week, lending for houses worth NT$80 million (US$2.67 million) or more in the greater Taipei area and loans for houses valued at NT$50 million or more in other parts of the country should not exceed 60 percent of the value of those properties with no grace period for debt repayment, the bank’s statement said.

This heightened attention to loans for luxury housing indicates the central bank’s desire to cool the housing market before it bubbles out of control and is expected to deter potential buyers. The question is how long it will remain effective, as idle funds will end up flowing into the real-estate market in the long term, as long as the borrowing costs remain low and there is still a lack of alternative investment options.

The central bank has issued certificates of deposit to help absorb the banking system’s idle funds, but that is likely to prove insufficient and less effective, because banks still have too much cash on hand and they will strive to win customers amid still-intensifying market competition — once banks can find ways to circumvent the central bank’s regulations.

No one would criticize the central bank’s desire to curb property speculation, but what raises other concerns is that there has been no concerted action from other government agencies to improve the housing market or the nation’s declining competitiveness and delayed economic restructuring.