“I believe interest rate adjustments should be timely and progressive, never too strong or too late. Drastic tuning might affect financial stability and increase market volatility, while a belated monetary policy decision would defer the intended effects and thus be detrimental to sustaining economic growth. This is the reason why the CBC tends to fine-tune its policy rates,” says CBC governor Fai-Nan Perng.
During the monetary tightening cycle that concluded in June 2008, Mr Perng’s fine-tuning was underpinned by the knowledge that inflation was being driven by the cost of imported commodities, rather than the strength of domestic demand. “When faced with cost-push inflation, excessive monetary tightening would inevitably cause income to decline further, hurting economic growth. A sound mix of fiscal and monetary policy would be more appropriate under these circumstances,” he says.
After the Lehman Brothers collapse and ensuing global financial disruption in September 2008, the CBC was also quick to see the need for a change of direction, with interest rate cuts beginning less than a fortnight later. At the same time, to restore the confidence of depositors, the government declared full guarantee coverage on bank deposits from October 2008 to the end of 2009, and also agreed to guarantee interbank call loans over the same period. “The CBC has worked together with other financial authorities to maintain sufficient liquidity and stability in financial markets. We believe the stress in Taiwan’s financial system will soon begin to ease,” says Mr Perng.
To match the increased globalisation of financial flows, he urges more co-ordination between central bankers in the future. “Taking regional co-operation in Asia as an example, I suggest that a monetary fund be established which pulls together economies with abundant foreign exchange resources, including Taiwan, to assist economies harder hit by financial crises,” he explains.
