EDITORIAL: A look into the low-rate debate

Is there a low-interest-rate trap in Taiwan? The minutes of the central bank’s Sept. 17 board meeting detailed a heated debate among board members over the monetary authority’s decision to keep its benchmark discount rate unchanged at 2 percent for a 10th consecutive quarter. The minutes, released on Thursday, revealed directors’ different understandings of Taiwan’s economy and the policy challenges the central bank faces.

Most of the central bank’s board directors have long argued that a rate hold is necessary to sustain Taiwan’s economic and financial stability amid global uncertainties, conflicts in the Middle East and the shifting policies of foreign central banks. However, two of the bank’s 15 directors dissented again and advocated a rate hike at the Sept. 17 meeting — similar to what occurred at the bank’s meeting in June.

One of them said the bank should start normalizing its monetary policy after a long period of low rates. As Taiwan’s economy is strong, a rate increase would not aim to smooth economic cycles or curb inflation, but rather seek to move interest rates toward a more neutral level and maintain long-term economic stability, they said.

The director also said that Taiwan’s housing-related inflation remains high and that the real interest rate for one-year fixed deposits would remain negative this year and next year. Low-income households spend a larger share of their income on daily necessities and bear a heavier burden of inflation, which is a legitimate reason to normalize monetary policy, they said.

Another dissenting director said that rising producer prices could eventually feed through to consumer prices, while import prices continued to rise, and that a widening Taiwan-US interest rate gap would add to depreciation pressure on the New Taiwan dollar, which in turn would make imported goods more expensive.

Opponents of a rate hike said that Taiwan’s inflation is low and stable compared with many other economies, and that the central bank’s benchmark rate is already the highest since 2009, so there is no low-rate trap, the minutes showed. One director said that the bank’s policy should not be considered too loose simply because the real interest rate is so low, adding that Taiwan’s real interest rate is still higher than that of many other major economies. Several directors said that a hasty interest-rate hike would have a significant impact on traditional industries and small and medium-sized enterprises (SMEs), and that, as the artificial intelligence (AI)-driven economic boom has increased funding demand from tech companies, a rate hike could further worsen the uneven allocation of funding among local industries.

The nation’s economic growth remains strong due to the AI and semiconductor boom, with GDP in the third quarter growing by an estimated 14.36 percent year-on-year, the highest for the same quarter in 48 years. GDP in the first three quarters is estimated to have expanded 14.22 percent from a year earlier, the highest for the period in five decades, the Directorate-General of Budget, Accounting and Statistics said on Friday. However, critics have said that the central bank is hesitant to raise rates because the domestic economy, housing market, stock market and roaring tech sector have become deeply reliant on cheap liquidity. Yet prolonged low rates have also created severe housing and living burdens for salary earners, low-income households and young people who do not benefit from asset appreciation.

The central bank faces a policy dilemma: Even though housing-related inflation remains high, most of the bank’s board directors are unwilling to raise rates for fear of harming exports, traditional industries, SMEs and young people burdened with heavy mortgages. However, when interest rates stay low for an extended period, investors, households and financial institutions are forced to, or choose to, increase the risk level of their overall investment portfolios in pursuit of better returns. That can lead to harmful consequences, such as individual investors and households sustaining heavy losses. Financial institutions would face potential crises from nonperforming loans and accumulated credit risks.

It is always difficult to judge the central bank’s monetary policy in the moment. However, policymakers must make decisions that comply with the bank’s policy goals and that reflect the economic climate and market forecasts. The central bank must be vigilant if low interest rates are accompanied by other signs of risk-taking, such as rampant stock investments and rapid credit and asset price increases, because the real problem might not be inflation and economic growth, but dire issues of income distribution and housing justice.