Central Bank Board of Governors meeting exposed! The two governors urged an interest rate hike.
Whether Taiwan has fallen into a "low interest rate trap" has triggered a confrontation among central bank governors! The central bank released the minutes of the third-quarter Board of Governors meeting, which showed that 13 directors supported keeping interest rates unchanged and two directors advocated raising interest rates. One of them believed that Taiwan should seize the opportunity of strong economic growth to correct excessively low interest rates and get Taiwan out of the low interest rate trap; another director countered that Taiwan's inflation is well controlled, the economy continues to grow, and the current policy interest rate is the highest since 2009. There is no problem of low interest rate traps or normalization of monetary policy.
Taiwan's interest rates have remained unchanged for 10 consecutive quarters, but not all governors are unanimous. In both the second and third quarters, two governors advocated that interest rates should be raised. One of the directors who advocates promoting the normalization of monetary policy pointed out that raising interest rates now is not to curb economic fluctuations or combat inflation, but to correct excessively low interest rates, maintain a neutral stance on monetary policy, and take into account economic stability.
The director believes that Taiwan's economic growth is strong, but inflation risks still exist. For example, the residential CPI is still high; the one-year time deposit real interest rate is still negative this year and next year, which may imply that the current monetary policy is too loose compared to the neutral real interest rate. In addition, the central bank’s 28-day certificate of deposit interest rate is also the lowest among major countries.
The director also pointed out from the perspective of "inflation inequality" that low-income households' expenditures are concentrated on necessities and have limited substitution capabilities, making it difficult to adjust their consumption structure and therefore bear a heavier burden of inflation. This is also the reason to promote the normalization of monetary policy.
However, another director expressed a different view, pointing out that Japan has been stuck in deflation and stagnant economic growth for a long time, and has adopted zero or even negative interest rate policies for a long time. In recent years, it has gradually raised interest rates and moved towards normalization. On the other hand, Taiwan has good long-term inflation control, sustained economic growth, and positive policy interest rates. It is currently the highest since 2009. There should be no low interest rate trap.
The director emphasized that whether the policy interest rate is low and needs to be adjusted should be based on whether inflation is well controlled, and cannot only be based on the level of nominal interest rates, or whether the real interest rate is negative. From January to August this year, Taiwan's average CPI annual growth rate was 1.84%. Inflation pressure is still controllable, reflecting that the current policy interest rate level is still appropriate.
Regarding real interest rates, the director further pointed out that since the beginning of this year, the real interest rates of major economies and Taiwan have been mostly negative, and Taiwan is still higher than the economies of the Eurozone, Switzerland, the United States, and Japan. As for the neutral interest rate, Taiwan is a small open economy, so it is estimated to be even more difficult and difficult to use as a basis for interest rate decisions.
In addition, in addition to "price" tools such as interest rates, the central bank also has "quantitative" tools such as selective credit control and deposit reserve ratios, which also have a tightening effect. Therefore, it is not appropriate to directly compare the level of policy interest rates with other countries.
Another director who advocates raising interest rates is worried that domestic domestic sales prices and import prices continue to rise, which may be passed on to CPI in the future. The policy interest rate should be raised to slow down the expansion of aggregate demand and inflationary pressure.
Many directors who support keeping the interest rate unchanged believe that Taiwan's economic growth is mainly concentrated on AI-related exports and capital expenditures, and domestic demand has not yet boomed. Raising interest rates at this time may increase the burden on traditional industries, small and medium-sized enterprises, and mortgage households that have not benefited from the AI wave. Prices and financial conditions should continue to be monitored.
