Monetary Policy Decision of the Board Meeting (2021Q3)

       I. Global economic and financial conditions

Since the Board met in June this year, faster vaccination against the coronavirus (COVID-19) in major economies, coupled with monetary and fiscal policy support, have led global economic and trade activity to expand continuously. Meanwhile, with increasing global demand and lingering supply chain bottlenecks pushing up international goods prices, major economies have witnessed a pronounced uptick in inflation, judged by their central banks to be transitory. Moreover, some economies recently experienced recurring virus outbreaks and market investors kept a close watch on major central banks’ moves toward asset purchase tapering, both adding to volatility in international financial markets.

The global economy is expected to register a strong recovery this year. However, uneven vaccination progress across regions and the spread of new virus variants may lead to divergent recoveries across economies. In addition, adjustments to the accommodative monetary policy stance by some central banks in advanced economies, along with geopolitical conflicts and climate change-related risks, could increase uncertainties over global economic and financial prospects. International institutions project the world economy to grow at a slower pace next year and inflation to drop back.

      II. Domestic economic and financial conditions

1. From mid-2021, Taiwan's exports continued to record strong expansion thanks to robust orders for tech products and traditional manufacturing goods. In terms of domestic demand, as tech firms increased capital outlay, private investment posted steady growth. With relaxed restrictions following the downgrade of the health alert amid the easing of the domestic pandemic situation, consumer confidence gradually rebounded. Combined with the government's forthcoming rollout of consumption stimulus measures, it is expected that private consumption would show an upturn. The Bank forecasts Taiwan's economy to expand by 3.43% for the second half of the year and 5.75% for the entire year (Appendix Table 1). As for labor market conditions, the unemployment rate moved down to 4.24% in August, still a high level. The number of employed persons remained below the pre-pandemic level, with the services sector in particular witnessing a more significant decrease in hiring.

   Looking ahead to next year, bolstered by continuous recovery in major economies and still solid demand for emerging technology applications, Taiwan's exports and private investment are likely to see sustained growth momentum, albeit at slower rates owing to the base effect. Private consumption is anticipated to gather pace as the domestically-oriented services sector shows signs of recovery, helping to boost employment and wage growth. Overall, the Bank forecasts that Taiwan's economic growth would advance at a pace of 3.45% in 2022.

2. As torrential rain caused domestic vegetables prices to surge, along with elevated international oil and other raw material prices, the annual growth rate of the consumer price index (CPI) rose to 2.36% in August while that of the core CPI (excluding fruit, vegetables, and energy items) registered 1.33%. For the first eight months of the year, the average annual growth rates of the CPI and the core CPI were 1.64% and 1.18%, respectively. It is projected that the annual CPI growth rate would remain high in the third quarter, reflecting temporary, weather-induced upside pressures, whereas the annual growth rate of the core CPI would trend down further in the second half of the year. For 2021 as a whole, the Bank forecasts the CPI and core CPI annual growth rates to be 1.70% and 1.17%, respectively (Appendix Table 2).

   For the year of 2022, given a stable outlook for global oil prices forecasted by international institutions, the Bank projects that the annual growth rates of the CPI and the core CPI would both drop to 0.92%. The forecasts by international and domestic institutions for Taiwan's inflation next year average around 1.37%.

3. In recent months, banks' excess reserves stayed around NT$60 billion and above. The average annual growth rate of the monetary aggregate M2 dropped from the 9.09% of the second quarter to 8.44% in August. Meanwhile, short- and long-term market interest rates fluctuated within a tight range. Overall, financial conditions were accommodative.

   Since the Bank first introduced the Special Accommodation Facility to Support Bank Credit to SMEs in April 2020 in response to the pandemic's economic impact, financial institutions have so far approved approximately 265 thousand applications totaling NT$399.7 billion. The annual growth rate of SME loans extended by banks stood at 12.27% at the end of July 2021 and the annual growth rate of overall bank lending registered an 8.01% rise.

     III. Monetary policy decisions

1. Overall, the current inflation upswing is viewed to be transitory and inflation is expected to be mild for this year as a whole, with next year's inflation outlook tilting to the downside. In terms of economic growth, the global recovery remains on track, though still facing multiple uncertainties. Meanwhile, with the pandemic situation under control at home, the domestically-oriented service activity is likely to gradually rebound and private consumption to pick up. Against this background, Taiwan's economy is expected to continue with mild expansion in the second half of 2021 and the year of 2022. Taking this assessment into account, the Board judged that maintaining the current policy rate levels and monetary easing 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%, 1.5%, and 3.375%, respectively.

   The Bank will closely monitor the evolution of the coronavirus pandemic, monetary policy stances of major central banks, geopolitical risks, and changes in global financial markets, 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.   

2. To achieve the goals of effective allocation and proper use of credit resources as outlined in the government's Healthy Real Estate Market Plan, the Bank made two successive amendments in December 2020 and March 2021 to its selective credit control measures. Though the amended Regulations Governing the Extension of Mortgage Loans by Financial Institutions have brought down the loan-to-value (LTV) ratios of those loans regulated, banks have continued witnessing marked increases in real estate lending. It is thus deemed necessary for preemptive actions to be taken to curb inordinate flows of credit into the real estate market and further rein in credit risk associated therewith. In this regard, the Bank amended the aforementioned Regulations, effective September 24, 2021, as follows (see Appendix for more details):

(1) Removing the grace period for a second home loan taken out by a natural person for housing located in the stipulated specific areas, namely Taipei City, New Taipei City, Taoyuan City, Taichung City, Tainan City, Kaohsiung City, Hsinchu County, and Hsinchu City.

(2) Lowering the LTV ratio cap on land loans to 60%.

(3) Lowering the LTV ratio ceiling on mortgage loans for idle land in industrial districts to 50%; stipulating that the "well-defined period of time" for the relevant exemptions to apply shall be "one year."

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 conduct a rolling review on the results of these regulations and measures and make timely adjustments as warranted to ensure sound banking operations and promote financial stability.

4. 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.