Monetary Policy Decision of the Board Meeting

I . Global economic and financial conditions

Since the Board met in June this year, various countries where the coronavirus (COVID-19) pandemic appeared to have eased have gradually lifted lockdown measures. The global economy showed signs of bottoming out, while international oil prices stabilized and global inflation rebounded. Major economies successively rolled out large-scale fiscal stimulus measures and maintained accommodative monetary policies to help restore normal economic activity. With ample global liquidity, international stock markets fluctuated and trended up, and long-term government bond yields remained at low levels. Meanwhile, the US dollar index experienced a downtrend, and currencies of major economies broadly appreciated against the US dollar.

A multitude of uncertainties such as recurrent coronavirus outbreaks in several economies in recent months, intensified US-China tensions, heightened global financial fragilities, and lingering geopolitical risks still cast a long shadow over the outlook for global economic and trade recovery. International institutions project the world economy to contract sharply this year and resume growth next year, albeit still below the pre-pandemic level.

II.Domestic economic and financial conditions

1. Taiwan's exports increased faster from July onwards thanks to robust outbound sales of electronic parts and components and information and communication products. Services exports, however, were constrained by a sharp decline of inbound visitors as some of the pandemic-related border controls remained in place. In terms of domestic demand, government stimulus measures and improved consumer confidence helped lift retail sales out of contraction. In addition, private investment rose steadily, led by capital expenditure expansions by semiconductor firms and the information and communication industry. As domestic economic growth would likely gain stronger momentum in the second half of the year, the Bank forecasts that for the entire year the economy would grow by 1.60% (Appendix Table 1). Meanwhile, labor market conditions improved slightly as the pandemic eased in Taiwan and the government's workers relief programs and job support measures began to show positive effects.

   Looking ahead to next year, Taiwan's export growth is expected to gather pace as major trading partners see their economies stabilize and companies continue to build up capacity locally. Private consumption would likely grow mildly amid an economic recovery. Private investment, while continuing to rise next year, would slow slightly compared with this year because of a higher base effect. Overall, the Bank forecasts that Taiwan's economic growth would advance at a faster pace of 3.28% in 2021.

2. For the first eight months of the year, the average annual growth rate of the consumer price index (CPI) was -0.27%, mainly owing to domestic energy price cuts amid international oil price slumps. The core CPI (excluding fruit, vegetables, and energy) recorded an average annual growth rate of 0.24%. Inflation is expected to stabilize in the latter half of this year, supported by a rebound in international raw material prices and a pickup in domestic consumer spending. For this year as a whole, the Bank forecasts the CPI and core CPI annual growth rates to be -0.20% and 0.24%, respectively (Appendix Table 2).

   The Bank projects that in 2021 the CPI and core CPI annual growth rates would rise to 0.92% and 0.62% respectively, noting the global economic recovery, higher oil prices as anticipated by international forecasters, and mild consumption demand at home.

3. The domestic financial system continued to enjoy ample liquidity; market interest rates, both long- and short-term, fluctuated modestly in recent months. Meanwhile, banks' excess reserves stayed at levels between NT$40 billion and NT$60 billion.

   In terms of credit support to help counter the economic impact of the pandemic, there were relief loan programs for both employers and employees implemented by the government. The Bank also announced an NT$200 billion special accommodation facility to support lending to small and medium-sized enterprises (SMEs), launched on April 1, 2020. So far, banks have processed 152,447 loan applications totaling NT$164.6 billion, showing that this facility has been helping to ensure smooth bank credit flows to SMEs. At the end of July, the annual growth rate of bank loans and investments was 7.19%, with loans to SMEs increasing by 11.86% year on year. For the first seven months of the year, the average annual growth rates of the monetary aggregate M2 and of bank loans and investments were 4.72% and 5.91%, respectively, indicating that money and credit conditions were sufficient to support domestic economic activity.

III.Monetary policy decision

The assessment of domestic and foreign economic and financial conditions shows that inflation is increasingly steady and the inflation outlook is mild, along with a slightly negative output gap next year. Our economic growth would pick up in the latter half of this year and continue to expand moderately next year with exports strengthening and domestic demand reinvigorated as the domestic COVID-19 situation remains under control. Compared with major economies, Taiwan's economy is projected to be relatively resilient in both 2020 and 2021. Against this backdrop, the Board judges that a policy rate hold and a continued accommodative monetary policy stance would help sustain price and financial stability and foster economic growth.

At the Meeting today, the Board decided unanimously to keep the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations unchanged at 1.125%, 1.50%, and 3.375%, respectively.

In view of elevated uncertainty over the economic and financial conditions of the world, the Bank will continue to closely monitor the future course of the coronavirus pandemic, monetary policy actions taken by major economies and the outcomes of their stimulus measures, the developments concerning the US-China relations, changes in the global financial markets, and the implications thereof for Taiwan's economy, financial conditions, and price trends. The Bank will adopt appropriate monetary policies as warranted to achieve its statutory duties.

IV.The NT dollar exchange rate is in principle determined by market forces. Recently, large and erratic foreign capital flows have caused greater volatility in Taiwan's foreign exchange market. The Bank will pay close attention to cross-border capital movements and act in line with its mandate to maintain an orderly foreign exchange market and safeguard financial market stability.