In a rare, year-long internal review released on 12 February, the Central Bank of the Republic of China (Taiwan) concluded that its long-standing “multi-indicator” framework remains effective — and that strict inflation targeting would be ill-suited to a small, trade-dependent economy facing volatile global shocks.
The report, titled Review of theMonetary Policy Framework and Operational Strategies, offers an unusually detailed look at how the bank balances interest rates, money supply, housing credit controls and exchange-rate management.
A Shift Away from “Single-Number” Policy
According to the report, Taiwan is classified by the International Monetary Fund (IMF) as a central bank that monitors multiple indicators — alongside institutions such as the U.S. Federal Reserve, the European Central Bank and the Swiss National Bank — rather than one that adheres strictly to inflation or monetary aggregate targets.
Since 2020, the central bank has adjusted its M2 money supply growth target from a formal “target zone” to a more flexible “reference range.” While M2 remains an important variable, policymakers now weigh a broader dashboard of indicators, including inflation expectations, output gaps, interest rates, exchange rates and overall financial conditions.
The shift reflects lessons learned after the 2008 global financial crisis, when many central banks concluded that inflation targeting alone could not safeguard financial stability.
Why Strict Inflation Targeting Falls Short
The review argues that rigid inflation targeting poses structural risks for small, open economies.
Taiwan imports much of its energy and raw materials. As a result, domestic inflation is often heavily influenced by external price shocks — forces beyond the direct control of monetary policy. Even aggressive rate hikes may struggle to contain imported inflation, while simultaneously putting pressure on financial stability and real economic activity.
Global supply-chain restructuring, climate risks and geopolitical tensions have further complicated inflation forecasting, the bank noted. Overly rigid adherence to a precise inflation point-target could lead to policy over-tightening or over-loosening.
Instead, Taiwan defines medium-term price stability as a consumer price index (CPI) growth rate between 0% and 2%, a flexible range that maintains accountability while preserving policy room to maneuver.
In plain terms: stability matters, but so does survival.
Three Operational Pillars
The report evaluates policy effectiveness across three operational areas:
1. Interest Rate Signaling
The central bank uses its 28-day certificate of deposit (CD) rate as the primary policy signal. Adjustments to this rate have successfully guided interbank and short-term market rates, transmitted through lending and deposit channels to influence output and prices.
Empirical analysis in the report suggests the rate channel, credit channel and asset-price channel remain functional and effective.
2. Money and Credit Management
After shifting to an M2 “reference range,” actual M2 growth has largely remained within the designated band, and the relationship between money growth, output and inflation has not shown structural breakdown.
Selective credit controls introduced in late 2020 have gradually reduced the concentration of bank lending in real estate, redirecting funds toward owner-occupied housing and urban renewal projects. Authorities say these measures have cooled speculative pressures without destabilizing the broader financial system.
3. Managed Floating Exchange Rate
Taiwan operates under a managed float regime. The central bank intervenes in foreign-exchange markets when necessary while conducting sterilization operations to prevent excess liquidity.
The result, according to the report, has been lower exchange-rate volatility compared with many major currencies, along with counter-cyclical properties that help cushion economic swings.
Alignment with the IMF's Integrated Approach
The central bank argues that its framework aligns closely with the IMF's “Integrated Policy Framework,” which allows policymakers to deploy a mix of tools — including interest rates, foreign-exchange intervention, macroprudential measures and, when necessary, capital-flow management — rather than following a rigid sequence.
For a capital-sensitive, export-driven economy like Taiwan, flexibility is not a luxury. It is structural insurance.
No Overhaul — But More Transparency
The report concludes that no fundamental changes are needed in the near term. The existing multi-indicator framework, combined with the three-pronged operational strategy, is described as stable and effective.
However, the central bank pledged to enhance communication and transparency, aiming to reduce market uncertainty and help the public better understand the logic behind policy decisions.
If the message from the review is distilled to one line, it is this: in a world of black swans and cross-border shocks, monetary policy cannot afford tunnel vision.
And Taiwan's central bank has no intention of developing it.
