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Economic Daily News: Lower interest rates to stabilize economy

Economic Daily News: Lower interest rates to stabilize economy

The U.S. Federal Reserve decided last week to leave key interest rates unchanged. This has reduced the risk of capital flowing out of emerging markets and has given countries more leeway to lower interest rates. In Taiwan, the question now is whether the central bank will lower interest rates during its next board meeting scheduled for Sept. 24. In making a decision, the central bank should consider the domestic and international economic situation, the consumer price situation, and real interest rate levels as well as the efficacy and effect of the policy. Taiwan's projected economic growth this year has been significantly lowered mainly because exports have declined for seven months in a row. Due to a fall in international oil prices, the value of petroleum-related exports also dropped, and this affects more than 60 percent of total exports. The key factor affecting exports, however, is foreign exchange rates, not interest rates. Therefore, lowering interest rates cannot resolve the problem of declining exports. Since the start of this year, Taiwan's consumer price index and wholesale price index have been falling mainly because the prices of oil and commodities such as food have dropped sharply, resulting in a plunge in import prices. Such a decline in prices is helpful to consumers, and the money saved can stimulate more purchases. There is no reason to lower interest rates to offset the fall in import prices. Furthermore, both short-term and long-term interest rates remain at low levels in Taiwan. The overnight interbank call-loan rate has dropped to around 0.3 percent, and the yield on a 10-year bond is just 1.5 percent, lower than in South Korea and other countries. The central bank still has many tools to create a loose capital environment. But Taiwan has been stranded in a so-called "liquidity trap," and even more capital will be unable to stimulate real demand. It is doubtful whether lowering interest rates will achieve the desired results. The European Union, Japan and many other countries have adopted an extremely loose monetary policy, and their real purpose was to force their currencies to depreciate. The situation in Taiwan is totally different. The central bank has sufficient ability to intervene and adjust the exchange rate of the Taiwan dollar and does not have to use interest rate cuts to guide the movement of the country's currency. The above analysis shows that strong objective conditions for lowering interest rates do not exist. But chances are high that the central bank might reduce interest rates slightly as a way to show its willingness to stabilize Taiwan's economy. This would be effective in boosting the nation's morale and easing political pressure. (Editorial abstract -- Sept. 21, 2015) (By Y.F. Low)


Updated : 2021-09-28 18:46 GMT+08:00