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Talk of the Day -- Monetary policy dilemmas

2012/05/12 21:58:17

The U.S. dollar rallied recently in foreign exchange markets around the world amid recurring concerns over sovereign debt risks in the eurozone.

Over the past week, the Taiwan dollar depreciated 0.44 percent against the greenback, with the exchange rate closing at NT$29.41 on Friday.

In comparison, the currency of South Korea, Taiwan's main trade rival, fell 1.3 percent over the past week.

In the year to date, the greenback has fallen 3 percent against Taiwan's currency but only 0.7 percent against the Korean won, and over the past two years it has lost 7 percent to the Taiwan dollar while remaining flat against the South Korean currency, putting Taiwanese exporters at a clear disadvantage.

While some senior executives of export-oriented industries have expressed hopes for a weaker currency to help boost their competitiveness in the global market, the Central Bank of the Republic of China (CBC) does not seem to share the view, according to local media reports.

Also on Friday, Hsu Chia-tung, chairman of the Taiwan Academy of Banking and Finance (TABF), said the central bank should take steps to help local banks deal with idle capital issues.

Noting that many local banks are awash with idle capital, Hsu said the central bank should speed up the process of soaking up this capital while government agencies help find appropriate ways to use it.

The following are excerpts from local media coverage of monetary policy issues:

Economic Daily News:

The Taiwan dollar rose modestly against the U.S. dollar in morning trade on Friday, but weakened at around 3 p.m. Currency dealers said the central bank did not actively intervene in market operations and the local currency closed at NT$29.41 against the greenback.

"It seemed the central bank saw no need to push the Taiwan dollar down further to the NT$29.5 level," said a banking executive.

Taiwan posted a 4.7 percent year-on-year decline in exports in the first four months of this year, and some industrialists expressed the hope that the local currency will depreciate further to help boost their competitive edge.

According to customs reports, Taiwan was the only one of the four Asian Tigers to have registered negative export growth during the first quarter of this year.

Market analysts said the central bank's reluctance to drive the Taiwan dollar down further against the greenback is probably related to inflationary concerns.

Domestic consumer prices are on the rise because of an average 10 percent increase in fuel prices in early April and looming hikes in electricity rates, and the analysts said the central bank feared that if it lets the Taiwan dollar fall too much, it will fuel import-induced inflation.

Meanwhile, TABF Chairman Hsu Chia-tung said a ban imposed by the central bank and the Financial Supervisory Commission preventing local banks from trimming their standard lending rates has left them with excessive idle capital.

"The central bank should be more responsive to local banks' plight by helping them slash idle capital in banking system," Hsu said Friday in a speech at Soochow University.

He said the central bank should not avoid trying to absorb some of the excess capital in the banking system simply because it is afraid of increasing its interest expenses. The central bank's conservative approach has led to too much idle capital in the system, causing banks to engage in cutthroat competition on interest rates, which has reduced their interest spreads, Hsu said.

As head of the Taiwan Financial Services Roundtable, Hsu said he has often received complaints from local banking executives about excessive idle capital issues. (May 12, 2012).

United Evening News:

Hsu again took issue with the central bank's monetary policy at a seminar on national development Saturday, saying the central bank should not give priority to making money for national coffers.

"If the central bank focuses on pursuing profits, it will maintain a loose monetary money that eventually leaves domestic interest rates at low levels," Hsu said, adding that such a trend would not contribute to domestic economic development in the long run.

Hsu further suggested that the central bank refrain from buying foreign currency to increase its foreign exchange reserves simply to earn more money for national coffers.

Speaking on the same occasion, CBC Governor Perng Fai-nan said the central bank has been following the law in carrying out its mission of maintaining domestic financial and currency stability as well as monitoring banking operations and boosting domestic economic development.

Perng said the central bank has made strenuous efforts to trim idle capital in the domestic market over the past few years.

In April 2009, domestic idle capital reached NT$154.1 billion, but the amount had been cut to around NT$10 billion as of March this year, Perng said.

Moreover, the spread between deposit and lending interest rates widened from 1.22 percentage points in 2009 to 1.43 percentage points in 2011. (May 12, 2012).

(By Sofia Wu)