Monetary Policy Decision of the Board Meeting (2021Q4)

     I. Global economic and financial conditions

Since the Board met in September this year, global economic and trade activity has continued to recover, underpinned by the easing of COVID-19 pandemic situations and monetary and fiscal stimulus measures adopted by major economies. However, lingering supply chain bottlenecks and elevated price levels of crude oil and other international commodities have prompted inflation rates in the US and the euro area to rise further. Meanwhile, rising pandemic uncertainties stoked by the recent spread of new virus variants, which induced market concerns over economic prospects, and the US Fed's faster tapering of asset purchases have combined to spark greater volatility in global financial markets.

International institutions forecast the global economic recovery to remain on track, though with softer growth momentum. As supply and demand imbalances diminish, global inflation is likely to gradually return to normal. Nevertheless, the global economy still faces multiple uncertainties, such as the evolution of the pandemic, the monetary policy stance of major central banks, developments of the US-China competition, and possible damages that climate change may cause,  which could present more downside risks to the global economic outlook.

     II. Domestic economic and financial conditions

1. In recent months, exports registered robust and steady growth and private investment sustained solid momentum. Moreover, with the domestic pandemic situation under control, the government rolled out consumption stimulus measures, leading to an upturn in private consumption. The Bank projects Taiwan's economy to post solid expansion in the fourth quarter of 2021 and revises up the GDP growth forecast to 6.03% for the entire year. In terms of labor market conditions, the unemployment rate continued its downtrend and the number of employed persons increased further, but have not yet returned to their pre-pandemic levels. From the beginning of the year, the average nominal total earnings of payroll employees of the industrial and services sectors recorded modest growth. However, as some occupations of the services sector were hit harder by the pandemic, the nominal total earnings of their payroll employees decreased, indicating uneven recovery momentum across sectors.

   Looking ahead to next year, a continued global economic recovery will help sustain growth momentum for Taiwan's exports and private investment, albeit with the growth rates moderating because of a higher base effect. With the domestically-oriented services sector gradually picking up, employment will witness a larger increase. In addition, the hikes in minimum wage and public sector employee pay may spur wage increases for workers in the private sector. Therefore, private consumption growth is expected to rebound. Overall, the Bank forecasts that Taiwan's economic growth would advance at a pace of 4.03% in 2022 (Appendix Table 1).

2. As international oil price uptrends since the start of the year have prodded up domestic fuel and lubricant prices, and a lingering effect from the disruptions of typhoon and torrential rain in August has led to a spike in fruit and vegetables prices, together with a more recent price hike by some food and beverage service providers, the annual growth rate of the consumer price index (CPI) has registered above 2% for several months in a row and stood at 2.84% in November. Excluding fruit, vegetables, and energy items, the core CPI increased at a milder pace than the CPI, posting an annual growth rate of 1.49% in November. For the first eleven months of the year, the average annual growth rates of the CPI and the core CPI were 1.91% and 1.28%, respectively. For the year as a whole, the Bank projects that the annual CPI growth rate would be 1.97% and that of the core CPI would register 1.31% (Appendix Table 2).

   Domestic inflation pressures have built up further since the middle of the year. However, price increases in Taiwan have not been as significant as those in European economies or the US. This was mainly because Taiwan has broadly kept the pandemic situation under control and has experienced little supply chain bottlenecks such as logistics problems, and the domestic labor market did not face capacity constraints and recorded mild growth in average non-farm employee earnings.

   Looking at next year, the base wage increase, the public sector pay raise, and potential price hikes in some sectors to reflect higher personnel and raw material costs could push prices upwards. Nonetheless, with major institutions projecting a slower ascent for international oil prices in 2022, the Bank expects the domestic CPI annual growth rate to drop to 1.59% and the core CPI to maintain mild growth at a pace of 1.45%. Similarly, most of the selected international and domestic institutions forecast Taiwan's 2022 annual CPI growth rate to run lower than this year.

3. In recent months, banks' excess reserves stayed somewhat above NT$60 billion. The monetary aggregate M2, which increased by 8.61% year on year during the third quarter, grew at a slower pace at 8.45% in October. Loans and investments by the banking sector continued expanding, posting an annual growth rate of 8.17% in October. Meanwhile, short- and long-term market interest rates fluctuated within a tight range. Overall, financial conditions were accommodative.

    III. Adjustments to the expiry dates of the Bank's Special Accommodation Facility

Back in April 2020, the Bank launched the Special Accommodation Facility to Support Bank Credit to Small and Medium-Sized Enterprises (SMEs). Under the Facility, financial institutions have so far approved more than 290 thousand applications with the total disbursement exceeding NT$460 billion, providing the pandemic-hit SMEs with the funds needed to stay afloat. As the pandemic situation was broadly stable at home, enterprises gradually resumed normal operation and the need for such funding assistance also waned. Therefore, the deadline for banks to accept new SME loan applications under the Facility will remain December 31, 2021, as previously announced.

For the Facility's accommodations to banks, effective December 16, 2021, those due for repayment by December 31, 2021 (i.e., those approved between April 1, 2020 and July 4, 2021) will be rolled over to June 30, 2022, so as to continue offering assistance by easing corporate funding burdens and to help the affected enterprises recover. Meanwhile, SME loans granted by banks under the Facility during the aforementioned period (2020/04/01 – 2021/07/04) will remain eligible for the Facility's preferential interest rates until June 30, 2022. 

Beyond June 30, 2022, when the Facility ceases to apply, banks' loans to SMEs will come from their own funds instead of the Bank's special accommodations and the interest rates will be set according to each bank's pricing strategies. To avoid possible disruptions to corporate funding, the Bank urges SMEs to prepare in advance with proper financial planning.

     IV. Monetary policy decision: maintaining the policy rates and adjusting the selective credit control measures

1. The Board considered the economic and financial conditions at home and abroad in today's meeting: The current domestic inflation situation is viewed as manageable and the inflation rate is expected to return to a slower pace next year. Taiwan's economy is projected to exhibit strong growth this year, albeit with divergence among different sectors, and is also expected to post solid growth next year as the global economic recovery continues onwards amid potential downside risks. Against this background, the Board judged that maintaining the current policy rate levels and monetary easing would help foster sound financial development and economic growth.

   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.

2. Looking ahead, given the uncertainty over global inflation, if domestic prices are persistently higher, or pandemic-hit sectors regain solid footing, or major economies begin to raise policy rates, the Bank may, as necessary, adjust its monetary policy timely and appropriately to fulfill its statutory duties.

3. Since December 2020, the Bank has made three amendments to the selective credit control measures, which have helped banks reduce credit risk. Nevertheless, recent data showed that real estate lending still made up a dominant share in total bank lending. To strengthen management of bank credit resources and curb credit flows toward property and land hoarding, the Bank decided to amend the Regulations Governing the Extension of Mortgage Loans by Financial Institutions, effective December 17, 2021, as follows (see Appendix for more details):

(1) Lowering the LTV ratio caps on a high-value housing loan and on a third (or more) housing loan to 40%. 

(2) Lowering the LTV ratio cap on land loans to 50%, including 10% thereof to be withheld for disbursement until construction commences within the promised time frame as formally undertaken by the loans' borrowers.

(3) Lowering the LTV ratio cap on loans for unsold new housing units to   40%.

(4) Lowering the LTV ratio cap on mortgage loans for idle land in industrial districts to 40%.

The Board judged that the measures adopted by the Bank to help rein in credit risk associated with real estate lending have represented active efforts in achieving effective allocation and proper use of credit resources, which are part of the government's Healthy Real Estate Market Plan. However, it still requires concerted actions under the Plan's various policy aspects in order to promote sound development of the real estate market.

Considering that the average mortgage burden ratio (monthly housing loan repayment as a percentage of monthly disposable income) of Taiwanese households exceeds 30%, the Bank urges mortgage borrowers to caution an immediate increase in repayment after the grace period and a risk of possible interest rate changes.

5. 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.