Central Bank of the Republic of China (Taiwan)

PRESS RELEASE                        Release Date: June 20, 2019

Monetary Policy Decision of the Board Meeting

I.        Global economic and financial conditions

Since the Board met in late March this year, the global economy has moderated further and trade growth has weakened. Meanwhile, escalating US-China trade conflicts and stalled Brexit progress have roiled international financial markets and increased downside risks to the world economy. International institutions have thus widely trimmed down growth projections for the world economy and trade volume this year, and major economies have broadly adopted a more accommodative monetary policy stance.

Looking ahead, global economic expansion may be further dampened by a multitude of uncertainties such as the developments of the US-China trade friction and the trade disputes among the US and other economies, heightened financial fragility of debt-ridden economies, the Brexit impasse, geopolitical tensions, and the volatile international oil prices.

II.     Domestic economic and financial conditions

1.    Since the beginning of this year, rising global economic and trade uncertainties have caused the global economy to decelerate, weighing on Taiwan's exports. In addition, the domestic stock market has moved with international stock markets and experienced greater fluctuations, denting consumer confidence and leading to a slowdown in the domestic economy. For the first four months of this year, the average unemployment rate was slightly higher than the same period of the previous year, and wage growth also expanded at a slower pace. However, the number of employed persons steadily increased, indicating that labor market conditions remained stable.

As for the second half of the year, global demand is expected to stay sluggish, yet the benefits from diverted orders owing to the US-China trade conflicts, as well as a lower base effect, are likely to slightly push up export growth. Moreover, the government's policies aimed at stimulating domestic demand should help spur private consumption and investment. As a result, the Bank forecasts Taiwan's economy to advance by 2.36% for the second half of the year (with 1.73% for the first half of the year), and 2.06% for the entire year. Nevertheless, future development of US-China trade negotiations will be a crucial factor for domestic economic growth.

2.    For the first five months of this year, both the consumer price index (CPI) and the core CPI (excluding fruit, vegetables, and energy items) rose at a moderate pace, posting average annual growth rates of 0.51% and 0.49%, respectively.

With the active typhoon season approaching, food prices could be disrupted by unfavorable weather conditions. In this view, CPI inflation is expected to increase faster in the second half of the year than in the first half. On the other hand, international oil prices are likely to trend lower than last year amid a softening global economic outlook, while domestic demand remains mild. A balance of these factors points to a stable inflation outlook for the year as a whole. The Bank forecasts the CPI and core CPI annual growth rates to be 0.87% and 0.76% for the year of 2019, respectively (Appendix Table 1).

3.    For the first five months of the year, the average annual growth rates of reserve money and the monetary aggregate M2 were 6.40% and 3.25%, respectively, while bank loans and investments grew by 5.14% year on year during the same period.

In recent months, net foreign capital outflow and the inflow of tax revenue towards the national coffers have led to slightly tighter funding conditions, and short-term market rates have risen modestly. The Bank has managed market liquidity with flexibility, and excess reserves of financial institutions have been maintained at a level of over NT$40 billion. In the meantime, domestic 10-year government bond yields have dropped in line with declining US bond yields, while the NT dollar has weakened against the US dollar (USD) amid international USD strength. Overall, domestic financial conditions remain accommodative.

III.  Monetary policy decisions

Based on the latest information about economic and financial conditions at home and abroad, the Board considers that domestic inflation is moderate, the negative output gap has widened marginally, and the inflation outlook stays stable. Although risks to the global economic prospects tilt increasingly towards the downside, steady domestic demand and a lower base effect would likely shore up the economic growth in the second half of 2019 to a pace faster than the first half year. Overall, the domestic economic expansion is expected to advance with mild growth momentum. Furthermore, Taiwan's real interest rates continue to register around the middle range among a host of economies (Appendix Table 2). 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.

The Board reached the following decision unanimously at the Meeting today:

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.

In light of multiple uncertainties overseas, the Bank will closely monitor the developments regarding monetary policy of major economies, US-China trade talks, geopolitical risks, and global financial markets, as well as their implications for Taiwan's economy and financial conditions. We will act timely as appropriate to fulfill the central bank's statutory mandate.

IV.   The recent surge in cross-border capital movements has amplified financial market volatility for many economies including Taiwan. However, compared with other major currencies, the NT dollar has experienced lower volatility in its exchange rate 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.