“I believe interest rate adjustments should be timely and progressive, never too strong or too late. Drastic tuning might affect financial stability and increase market volatility, while a belated monetary policy decision would defer the intended effects and thus be detrimental to sustaining economic growth. This is the reason why the CBC tends to fine-tune its policy rates,” says CBC governor Fai-Nan Perng.
During the monetary tightening cycle that concluded in June 2008, Mr Perng’s fine-tuning was underpinned by the knowledge that inflation was being driven by the cost of imported commodities, rather than the strength of domestic demand. “When faced with cost-push inflation, excessive monetary tightening would inevitably cause income to decline further, hurting economic growth. A sound mix of fiscal and monetary policy would be more appropriate under these circumstances,” he says.
