Central Bank of the Republic of China (Taiwan)

PRESS RELEASE                     Release Date: September 19, 2019

Monetary Policy Decision of the Board Meeting

I.        Global economic and financial conditions

Since the Board met in late June this year, heightened uncertainties such as ongoing US-China trade conflicts, rising economic and financial risks to the Chinese economy, the Brexit stalemate, and geopolitical tensions, have weighed on the global economy and weakened trade growth. Global financial markets have experienced dramatic volatility, leading to a flight of international capital to safe-haven assets and thereby dragging down government bond yields in major economies. International institutions have revised down growth forecasts for the world economy and trade volume this year, and major economies have broadly adopted a more accommodative monetary policy stance.

Looking ahead to next year, the global economic outlook seems clouded by multiple uncertainties including unclear international trade conditions, China's economic slowdown, and lingering geopolitical risks. Furthermore, monetary policy of major economies could also affect international capital movements and financial market stability.

II.     Domestic economic and financial conditions

1.    Since mid-2019, the global economy and world trade have continued to exhibit tepid growth, whereas Taiwan's exports have gradually rebounded on account of diverted orders from the US-China trade conflicts and elevated domestic production by Taiwanese businesses operating overseas, as well as a lower base effect. Although the unemployment rate in recent months slightly picked up and wage growth somewhat moderated, the government's active implementation of policies to boost domestic demand may help enhance consumers' willingness for consumption. In addition, with an anticipated increase in capital spending by manufacturers and returning Taiwanese investment, private investment is likely to expand steadily. As a result, the Bank forecasts Taiwan's economy to advance by 2.66% for the second half of the year, and 2.40% for the entire year (Appendix Table 1).

Projections for next year include steady growth in private consumption and higher government spending, contrasted by economic slowdowns in major economies and softer year-on-year growth in Taiwan's exports and private investment. The Bank therefore forecasts the domestic economy to expand by 2.34% in 2020.

2.    Domestic inflation has stayed low and stable since entering 2019. For the first eight months of the year, the consumer price index (CPI) and the core CPI (excluding fruit, vegetables, and energy items) posted average annual growth rates of 0.53% and 0.45%, respectively. For the second half of the year, inflation is expected to register mild growth as recent rises in fruit and vegetables prices owing to torrential rain would be somewhat offset by the subdued price trends for international crude oil and other raw materials. For the year as a whole, the Bank forecasts the CPI and core CPI annual growth rates to be 0.70% and 0.56%, respectively (Appendix Table 2).

Looking at inflation next year, prices of away-from-home food and services thereof are likely to be lifted by the minimum wage hike announced for the coming year. By contrast, international oil prices are projected by foreign institutions to remain below the levels of this year amid a weaker global economic outlook, and domestic demand is expected to be mild. These factors combine to support a stable inflation outlook, with the CPI and core CPI rising by 0.88% and 0.77% year on year according to the Bank's own forecasts.

3.    For the first seven months of the year, the average annual growth rate of the monetary aggregate M2 was 3.24% and that of bank loans and investments was 4.86%, indicating that money and credit conditions were sufficient to support domestic economic activity.  

In recent months, global financial markets have witnessed higher volatility, along with increased capital movements across the borders. Nonetheless, the NT dollar exchange rate has continued to show dynamic stability vis-à-vis the US dollar. Meanwhile, the domestic financial market has enjoyed ample liquidity, and both short- and long-term rates have held steady. Excess reserves of financial institutions have been maintained at a level of over NT$40 billion. Overall, domestic financial conditions remain accommodative.

III.  Monetary policy decisions

Based on the assessment of the latest economic and financial developments at home and abroad, the Board considers that domestic inflation is moderate, a marginal negative output gap continues for this and next year, and the inflation outlook is stable; as the global economy moves slowly ahead and uncertainties remain high, external demand could be dampened. In sum, it is expected that the domestic economy would advance with mild growth momentum in the second half of 2019 and in the year of 2020. Furthermore, Taiwan's real interest rates register around the middle range among a host of economies (Appendix Table 3). Therefore, the Board judges that a policy rate hold and a continued accommodative monetary policy stance will help ensure price stability and foster sound development of the economy and the financial sector.

At the Meeting today, the Board reached the following decision unanimously:

The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are kept unchanged at 1.375%, 1.75%, and 3.625%, respectively.

IV.   In light of elevated economic and financial uncertainties overseas, the Bank will closely monitor the implications of global developments – including the US-China trade talks, monetary policy moves in major economies, geopolitical tensions, and global financial market situation – for Taiwan's economy and financial conditions and act timely as appropriate to fulfill its statutory mandate.

V.      Recently, international foreign exchange markets have become more volatile, but, compared with other major currencies, the NT dollar has been relatively stable in terms of exchange rate movements vis-à-vis the US dollar.

In principle, the NT dollar exchange rate is determined by market forces. Nonetheless, if irregular factors (such as massive inflows or outflows of short-term capital) as well as seasonal ones lead to excess volatility and disorderly movements in the NT dollar exchange rate with adverse implications for economic and financial stability, the Bank will, in accordance with its mandate, step in to maintain an orderly foreign exchange market