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Central bank must be independent
Sunday, Jan 31, 2010, Page 8
In recent days and weeks, the central bank has been busy refuting market rumors
and media speculation that its repeated warnings on inflows of hot money and its
checks on banks’ foreign-exchange transactions and forward trades have caused a
decline on the stock market.
For its part, the central bank has done what it is required to do to safeguard
the nation’s economy, monetary policy and price stability in the long term,
although its recent rhetoric did have a direct impact on the exchange rate of
the New Taiwan dollar and indirectly on the stock market. Make no mistake, the
currency markets can impact equity markets in various ways — and vice versa.
Indeed, the growing uncertainty surrounding the world’s major economies’
monetary policies, international fund flows and exchange rates will likely lead
to considerable volatility in global stock and commodity markets this year. Many
investors are worried about governments potentially withdrawing stimulus
measures and central banks possibly tightening monetary policy.
The global financial crisis has not only reshaped the world’s financial system
and influenced policymakers’ attitude toward financial problems, but also
changed the relationships between governments and central banks.
The announcement that US Federal Reserve Chairman Ben Bernanke would stay for a
second term, the conflict between resigning Argentine central bank president
Martin Redrado and Argentine President Cristina Fernandez and South Korea’s
decision to send a vice minister to a central bank board meeting for the first
time in more than 10 years all suggest increased political influence on central
banks.
Taiwan is no exception, although in a more subdued way.
Like its global peers, Taiwan’s central bank will have to make a decision on
when to raise interest rates and implement other credit-tightening measures to
keep inflation in check, but that move will surely meet with corporate
opposition, especially from property developers, who will face higher borrowing
costs.
On the other hand, the central bank also needs to pursue a monetary policy that
is anti-inflationary, counter-cyclical and able to balance the needs of
exporters and importers, as well as of average income earners and big business.
The truth is, the central bank is not all-powerful and that is why economists
have long supported a central bank that is independent and able to defend its
credibility in the face of market and political pressure.
An amendment to the Organic Act of the Executive Yuan (行政院組織法), approved by the
legislature earlier this month, however, has raised concern about the
independence of the central bank, as it stipulates that the bank is a
subordinate agency under the Executive Yuan, instead of an independent
institution.
The central bank has immediately defended its independence on monetary policy
issues following the amendment’s legislative passage, citing the Central Bank
Act (中央銀行法).
The track record of Governor Perng Fai-nan (彭淮南) — who has been in the post
since February 1998 — shows that he is not concerned about market and political
pressure, but supporters of the central bank’s independence are concerned about
the long-term consequences of the amendment, especially when the central bank is
under a leader other than Perng.
Will future governments have the same respect for the central bank’s
“independence” after the passage of this amendment?
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