Monetary Policy Decision of the Board Meeting (2021Q1)
Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: March 18, 2021
Monetary Policy Decision of the Board Meeting (2021Q1)
I. Global economic and financial conditions
Since the Board met in December last year, the coronavirus (COVID-19) pandemic has gradually been brought under control, leading to a gradual recovery in global economic and trade activities, coupled with an uptrend in international crude oil and other commodity prices. International institutions project the world economy to return to positive growth this year and inflation to pick up mildly. Amid expectations of a global economic recovery and the US government's US$1.9 trillion fiscal stimulus package, recent inflation expectations in the US have strengthened markedly, driving up long-term government bond yields of major economies, and in turn causing greater volatility in international stock markets.
As the pandemic still weigh on economic activity, major economies have maintained an accommodative monetary policy stance and continued with expansionary fiscal policies. According to international forecasting institutions, global economic growth is likely to rebound in 2021. However, a string of uncertainties such as the coverage and effectiveness of vaccination, a possible tightening of financial conditions induced by recent rises in long-term bond yields of major economies, financial fragilities including considerably high levels of global debt, the development of US-China relations, and climate change risks still cast a long shadow over the global economic outlook.
II. Domestic economic and financial conditions
From the beginning of this year, continuously buoyant demand for electronic parts and components and information and communication products, as well as stronger sales of traditional manufacturing merchandise, boosted Taiwan's export growth substantially. With respect to domestic demand, labor market conditions remained stable and the unemployment rate dropped, while consumer confidence went up and retail sales continued growing. Taiwan's high-tech manufacturers increased capital expenditure, leading to an expansion in capital equipment imports. These developments indicated solid domestic economic growth.
Looking at the year as a whole, Taiwan's export growth is expected to gather pace amid faster recoveries across major economies, benefiting also from a sustained boom in global demand for emerging technology applications and for remote-work technologies. Private investment would gain momentum from stronger exports and expand further, while private consumption would likely grow moderately thanks to the economic upturn at home. The Bank forecasts that Taiwan's economy would expand by 4.53% in 2021 (Appendix Table 1).
For the first two months of the year, the annual growth rate of the consumer price index (CPI) averaged 0.59%, and the core CPI (excluding fruit, vegetables, and energy items) increased at an annual pace of 0.84%. For the year as a whole, inflation is expected to rebound as import prices trend up on the back of global price recoveries for oil and other raw materials and surging international freight charges. Domestic consumption is also expected to increase moderately. The Bank projects the CPI and core CPI annual growth rates to be 1.07% and 0.77%, respectively, indicating a mild inflation outlook (Appendix Table 2).
In the domestic financial system, liquidity remained ample, and banks' excess reserves stayed above NT$50 billion recently. Meanwhile, the average annual growth rate of the monetary aggregate M2 moved above 8%, higher than the Bank's reference range of 2.5%-6.5%. While short-term market interest rates fluctuated slightly, Taiwan's government bond yields tracked the uptrend of US Treasury yields and edged up. Overall, financial conditions remained accommodative.
Under the Bank's special accommodation facility, launched in April 2020 to help small and medium-sized enterprises (SMEs) adversely impacted by the pandemic, financial institutions have so far received approximately 207 thousand applications with the amount totaling NT$275.4 billion. At the end of January 2021, the annual growth rate of SME loans extended by banks reached 13.93% and the annual growth rate of overall bank lending rose to 7.44%.
III. Monetary policy decisions
At the Meeting today, the Board decided unanimously on a policy rate hold and on the amendments to the Bank's selective credit controls.
An overall assessment of the economic and financial conditions at home and abroad included a global economic recovery still faced with significant uncertainties, continued monetary easing and large fiscal stimuluses in major economies, mild domestic price trends and inflation outlook, and the prospect of a solid economic expansion. In this view, the Board judged that a rate hold would help sustain price and financial stability and foster economic growth.
The discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations are kept unchanged at 1.125%, 1.50%, and 3.375%, respectively.
The Bank will closely monitor the developments of the coronavirus pandemic, monetary policy stances of major central banks, changes in global financial conditions and economic and trade relations among major economies, and geopolitical risks, as well as the implications thereof for Taiwan's economy, financial conditions, and price trends, so as to adopt appropriate monetary policies as warranted to fulfill its statutory duties.
- The Bank's Regulations Governing the Extension of Mortgage Loans by Financial Institutions, renamed after amendment, took effect on December 8, 2020 as a part of the policy efforts to promote ''efficient allocation and proper use of credit resources'' under the government's ''Program to Foster a Sound Real Estate Market.'' Since the enactment, mortgage loans stipulated therein have been taken out at lower loan-to-value (LTV) ratios and higher interest rates. However, banks' real estate lending continued to increase markedly. Therefore, with the aim of stemming an inordinately high flow of bank credit into the real estate sector and further reining in credit risk of such lending, the Bank decided to introduce the following amendments (Appendix), effective March 19, 2021:
(1) Lowering the LTV ratio cap on housing loans extended to corporate entities: capped at 40%.
(2) Adjusting provisions on housing loans extended to individuals (natural persons):
A. Lowering the LTV ratio cap on a third housing loan from 60% to 55%; introducing a new LTV cap of 50% on a fourth (or more) housing loan (previously subject to a 60% cap).
B. Lowering the LTV ratio cap on high-value housing loan from 60% to 55%; introducing a new LTV cap of 40% on a fourth (or more) housing loan (previously subject to a 60% cap) extended to a borrower with three outstanding housing loans.
(3) Introducing a new LTV ratio ceiling on mortgage loans for idle land in industrial districts: capped at 55%.
The Bank will pay close attention to developments in the housing market and banks' management of credit risk associated with real estate lending. We will also monitor the results of the regulations and measures introduced and make timely adjustments to the relevant measures as warranted.
- The NT dollar exchange rate is in principle determined by market forces. Nonetheless, when seasonal or irregular factors (such as massive inflows or outflows of short-term capital) lead to excess volatility and disorderly movements in the NT dollar exchange rate with adverse implications for economic and financial stability, the Bank, in line with its statutory mandates, will step in to maintain an orderly market.