Chen Nanguang, vice president of the central bank, recently wrote a book and pointed out that from historical experience, the monetary policy of stop-and-go and premature easing will only delay inflation for a longer period of time and make it easier to fall into the trap of stagnant inflation. He called on The central bank should not be optimistic that “Taiwan’s inflation is relatively moderate” and take it lightly. Chen Nanguang pointed out that although all parties are worried that the central bank will raise interest rates rapidly, which may cause a severe blow to economic activities. In fact, in response to the rapid rise in global inflation since 2021, central banks in many countries have implemented the most synchronized and rapid monetary tightening policies in the past 50 years.
During 2022, the European Central Bank, the Bank of England, the Central Bank of New Zealand, the Bank of Canada, and the Bank of Israel, etc., have all seen policy interest rate hikes by 3 yards (1 yard is 0.25 percentage points), or even 4 yards, and by 2 yards. There are countless rate hikers.
As for how high interest rates should be raised to control inflation expectations and inflation, Chen Nanguang said that in principle, terminal interest rates must effectively control inflation, but its level is related to inflation and financial conditions in various countries, and there is no conclusion.
Another indicator that can be referred to is the real interest rate. If the nominal interest rate can be raised to make the real interest rate turn positive, it will be more effective in curbing aggregate demand and controlling inflation expectations.
Chen Nanguang pointed out that historical experience strongly warns that a stop-and-go monetary policy that loosens prematurely will only delay inflation for a longer period of time and make it easier to fall into the trap of stagnant inflation. Beginning in June 2022, the US Federal Reserve will sweep away its previous negative attitude of insisting that inflation is temporary and that it will only raise interest rates by 1 yard in March 2022, and will instead adopt a fast and then slow rate hike, with each increase of 3 yards. Until December 2022, the rate hike will be reduced to 2 yards.
Chen Nanguang pointed out that the policy actions and declarations of the Federal Reserve have also actively learned lessons from historical experience. After observing that the Fed will raise interest rates rapidly in 2022, it will indeed help inflation stabilize in a short period of time. Inflation and the public Inflation expectations have not deteriorated further.
In the face of inflation, Chen Nanguang also mentioned the role that Taiwan’s central bank should play. Chen Nanguang believes that Taiwan’s inflation seems to be relatively low compared to other countries due to factors such as policy controls and the underestimation of the consumer price index (CPI) rent index.
Chen Nanguang pointed out that if the central bank wants to be able to shoulder the responsibility of price stability, it must have a good grasp of inflation and inflation expectations; the central bank should not only strengthen relevant research in this area as soon as possible, but also compile more diversified price indicators , and conduct a survey of public inflation expectations.
Regarding the housing market, Chen Nanguang pointed out that following December 2021, the central bank has not proposed further selective credit control measures for the housing market, but housing prices in Taiwan continued to soar during this period. In fact, most of the countries where house prices rose sharply during the epidemic have begun to reverse, while Taiwan’s house prices are still accelerating.
Chen Nanguang said that the central bank should face up to its responsibility to deal with high housing prices, and adopt appropriate policy tools, such as a combination of selective credit control and monetary policy, to fulfill its statutory duty of stabilizing the financial sector.
