The government is considering various measures to ease inflationary pressure, including adjustments to interest and exchange rates. The Cabinet has also set up a price stabilization task force to demonstrate its determination to fight inflation.
Obviously, the latest pressure stems from the recent hike in domestic fuel prices and expected increase in electricity rates and has nothing to do with the international situation. There is therefore no need to tackle the problem by raising the value of the Taiwan dollar or lowering the import duties on staples.
Past experience has shown that monetary policy has little effect on curbing cost-driven inflation. Raising interest rates will not help solve the problem but instead will worsen the already sluggish economic situation. Authorities must exercise extra caution in employing monetary policy instruments.
In fact, production globalization, trade liberalization, and intense competition in Taiwan's consumer market over the past 20 years have greatly eased inflationary pressure in the country. Even in 2008 when global commodity prices were soaring, Taiwan's consumer price index increased only moderately by 4.5 percent.
Compared with inflation, the potential loss of growth momentum in Taiwan's economy deserves greater attention.
Taiwan's exports declined by 4 percent in the first quarter of this year, while industrial production and retail sales decreased 5.4 percent and 1 percent, respectively, in the first two months. At the same time, the world's three major economic engines -- Europe, the United States and China -- are either struggling with financial woes, a fragile recovery or slowdown.
Our government needs to clearly identify the greatest challenge facing Taiwan today. It must be careful that its price stabilization measures do not become a stumbling block to economic growth. (Editorial abstract -- April 20, 2012)
(By Y.F. Low)