Monetary Policy Decisions of the Board Meeting
Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: March 19, 2020
Monetary Policy Decisions of the Board Meeting
I. Global economic and financial conditions
Since early this year, the spread of the COVID-19 pandemic has disrupted global supply chains and weakened the growth momentum for international trade and consumption demand. Real economic activities have been widely affected and international financial markets have experienced dramatic volatility. Among international commodities, sharp declines in crude prices have exerted a downward pressure on global inflation. Moreover, factors such as the uncertain prospects for trade deal negotiations among major economies as well as geopolitical conflicts also substantially heighten downside risks to the global economy. International institutions have successively made significant downward revisions to forecasts for global economic growth this year.
Given rising uncertainties surrounding the impact of the virus on global economic and financial conditions, major economies have recently adopted an accommodative monetary policy stance and announced expansionary fiscal policy to shore up economic growth.
II. Domestic economic and financial conditions
With the spread of the coronavirus, the global economy is expected to expand at a notably slower pace this year, which may undermine Taiwan's exports. In addition, the number of inbound visitors has drastically decreased, dampening growth in service exports. In terms of domestic demand, as the virus outbreak weighed on domestic consumer confidence and labor market conditions, private consumption expenditure is anticipated to be constrained. On the other hand, while investment plans in the manufacturing sector may also be affected, imports of capital equipment considerably increased in 2019, leading to a higher comparison base. Therefore, private investment is likely to register mild growth.
As the coronavirus is projected to drag down the domestic economy in the first half of the year, the Bank revises down the growth forecast of Taiwan's economy to 1.07% for the first half of the year. If global supply chains gradually resume production in the second half of the year, export growth is likely to regain momentum. In addition, the rebound effect deriving from deferred private consumption, along with the government's relief and stimulus measures to bolster domestic demand, point to a possible pickup in domestic economic growth in the second half of the year. The Bank forecasts the domestic economy to expand by 1.92% in 2020 (Appendix Table 1). The developments of the COVID-19 outbreak will be a key variable for Taiwan's economy this year.
For the first two months of the year, the consumer price index (CPI) and the core CPI (excluding fruit, vegetables, and energy items) registered average annual growth rates of 0.81% and 0.48%, respectively. In terms of the inflation outlook, considering the adverse impact on domestic consumption demand caused by the spread of the virus, combined with plunging international oil and raw material prices, the Bank trims the forecasts of the CPI and core CPI annual growth rates for 2020 to 0.59% and 0.55%, respectively (Appendix Table 2).
The domestic financial system continues to enjoy ample liquidity and smooth functioning of financial intermediation. For the first two months of the year, the level of banks' net excess reserves stayed around NT$45-NT$55 billion and bank credit steadily increased. Short-term market interest rates generally moved around a lower level while long-term rates trended downwards.
III. Monetary policy decisions
The coronavirus pandemic has caused global economic prospects to deteriorate drastically and international financial markets to fluctuate violently. On the domestic scene, manufacturers could face supply chain disruptions, and some parts of the service sector could run into problems from slowing business. Small- and medium-sized enterprises could particularly suffer if funding access turns limited, which could in turn weigh on employment. Meanwhile, with major currencies experiencing more marked depreciations, the NT dollar has shown relative strength.
Therefore, to help support business continuity and to caution against the adverse implications of massive cross-border capital flows for financial stability, the Board judged that a policy rate cut was necessary. The Board also decided to set in place a special accommodation facility to help the SMEs to get through financial distress. These actions are expected to buttress confidence of households and businesses, to help sustain the smooth functioning of economic activity and to facilitate the Bank's efforts towards the fulfillment of its mandate.
The Board reached the following decisions unanimously at the Meeting today:
The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral will, effective March 20, 2020, be reduced by 0.25 percentage points to 1.125%, 1.50%, and 3.375%, respectively.
The Bank will continue to closely monitor new developments of the coronavirus outbreak and the monetary policy actions by major economies, as well as the resultant effects on the economic and financial conditions at home and abroad. The Bank will, should the situation warrants, hold Executive Directors' Meetings or emergency Board Meetings outside the regular schedule and deploy monetary policy tools to act as appropriate to fulfilling its statutory mandates.
Under the special accommodation facility, the Bank will, preliminarily, provide banks with additional funds of a total amount of NT$200 billion and at a rate of one percentage point lower than the policy rate on accommodations with collateral, in order to support credit extensions to SMEs. The interest rate charged on loans extended to SMEs under this facility would, preliminarily, be capped at the aforementioned rate on special accommodations plus one percentage point (Appendix 1). The Bank will regularly review the implementation of the facility and make timely adjustments as needed.
IV. Meanwhile, as part of the Bank's efforts to ensure continued availability of liquidity, banks may also use their holdings of the certificates of deposit (CDs) and negotiable certificates of deposit (NCDs) issued by the Bank to request early withdrawal or to take out secured loans. In case of emergency, the Bank's expanded repo facility, introduced in 2008 at the onset of the global financial crisis, could also be utilized to provide sufficient market access to liquidity. Under the broadened scope, securities firms and insurance companies are included as eligible counterparties in addition to banks and bills finance companies (Appendix 2). Banks with ample funds are urged to fulfill their roles as financial intermediaries and extend loans as needed to viable businesses.
V. Taiwan has recently witnessed frequent short-term capital movements with adverse implications for the domestic forex and stock markets. The Bank will pay close attention to cross-border capital flows and act in line with its mandate to maintain an orderly foreign exchange market and safeguard financial market stability.
VI. The coronavirus outbreak is causing serious supply and demand shocks to the global economy. While the government has begun to introduce relief measures and stimulus programs, the Bank has also undertaken supportive actions with an easy monetary environment and a special SME accommodation facility. It is expected that the combined efforts would work in concert to promote steady growth for the Taiwan economy.