EDITORIAL: Central bank bucks the trend

The central bank on Thursday kept interest rates unchanged for a 10th consecutive quarter, while further easing housing credit controls by raising the loan-to-value ratio cap on loans for a second home to 70 percent from 60 percent. The bank also raised its GDP growth forecast for this year to 11.48 percent, up from 9.45 percent estimated in June, and revised its full-year inflation forecasts upward to 2.03 percent for the consumer price index (CPI) and 2.16 percent for core CPI (excluding vegetables, fruit and energy items) from 1.91 percent and 1.9 percent respectively.

The move surprised market observers who had expected the bank to follow the global tightening trend after the US Federal Reserve raised rates by 0.25 percentage points last week. The Bank of Japan also raised its rates on Friday. The European Central Bank and the Bank of Korea have lifted rates twice since June. Taiwan’s central bank has held its policy rates unchanged since March 2024. Before the board meeting, it faced considerable pressure over whether to raise rates, as CPI had remained above its 2 percent alert threshold for four consecutive months. Last week’s decision was not unanimous, with two board members voting for a rate hike.

After the meeting, central bank Governor Yang Chin-long (楊金龍) reiterated that the bank had adopted a more hawkish stance since March 2024, which included several rounds of selective credit controls on the housing market. He cited three reasons the bank was bucking the global tightening trend. First, consumer inflation remains relatively moderate, and the forecast points to downward pressure on inflation next year. Second, the bank is using quantitative tools and monetary operations rather than interest rates to manage money supply conditions and contain liquidity expansion. Third, and perhaps most important, the economic recovery remains uneven. The artificial intelligence (AI)-driven export boom has boosted the high-tech industry, but traditional industries and small and medium-sized enterprises (SMEs) are still struggling, while domestic consumption and wage growth remain moderate. A rate hike would increase mortgage burdens for first-time homebuyers and harm traditional industries and SMEs, Yang said.

Keeping rates unchanged demonstrated the central bank’s belief that imported inflation remains under control. However, economists at DBS Bank Ltd and Capital Economics Ltd said that the central bank’s inflation outlook seemed a bit sanguine. DBS cited elevated international energy and commodity prices and persistent domestic inflation expectations. The central bank itself said services inflation showed downward rigidity.

Compared with its June meeting, the bank last week devoted significantly more time to the importance of the M2 money supply. The bank said that as the M2 annual growth rate is still lower than the economic growth rate plus the inflation rate, its monetary-policy stance remains relatively high. That shows that the bank’s policy framework relies not only on interest rates but also on open market operations. Even without rate hikes, the bank has effectively guided market rates upward and contained monetary expansion through quantitative adjustments.

Overall, the bank remains cautious about conveying its slightly hawkish bias in monetary policy and points to a clear K-shaped divergence in the economy. The bank’s latest changes to certain housing credit rules reflect its observation of a decline in real-estate loan concentration, continued weakness in property transactions and softer expectations for housing price increases. The market’s attention has shifted to December. Can Taiwan firmly chart its own course if the Fed continues to raise rates, or if the US-Iran conflict escalates and inflationary pressures persist?

Moreover, uneven economic growth has challenged the bank’s monetary policy. While keeping rates steady helps safeguard traditional industries and SMEs, the AI-driven economic boom has led local lenders to prioritize funding for tech companies, putting traditional industries and SMEs under pressure, Yang said. This uneven capital allocation is a structural issue the central bank cannot solve through monetary policy alone.

Yang called for interagency coordination to address this problem. For example, state-owned banks could use their influence to improve funding access for companies in need; the Financial Supervisory Commission could encourage local lenders to support traditional industries and SMEs; the Small and Medium Enterprise Credit Guarantee Fund could bolster credit guarantees to reduce lenders’ concerns about extending loans; and Chunghwa Post, with its large deposit base, could assist in market fund allocation. As funding demand from tech companies and stock market transactions has risen, even though liquidity in the overall banking system remains ample, the current structural problems require broader action from government agencies, not just interest rate adjustments by the central bank.