Monetary Policy Decision of the Board Meeting (2022Q1)

      I.  Global economic and financial conditions

Since the Board met in December last year, the global economic recovery has remained on track amid an Omicron-driven pandemic resurgence and lingering supply chain bottlenecks. The recent Russian invasion of Ukraine has propelled major economies to impose economic and financial sanctions on Russia, hampering global commodity supply, inducing commodity price surges, and thereby creating further inflationary pressures. In addition, as the US Fed and other central banks in major economies began to reduce monetary policy accommodation, the global economy this year is expected to grow at a slower pace. Owing to the impacts of the Russia-Ukraine conflict and the ensuing sanctions, international financial markets experienced greater volatility. International institutions trimmed down the global economic growth forecast for this year and revised up their projections for global inflation.

Looking ahead, risks such as geopolitical tensions, surging international raw material prices, recurring outbreaks caused by new coronavirus variants, and aggravating threat from climate change could contribute to more persistently high global inflation, negative impacts on economic activity, and heightened financial market volatility, posing greater downside risks to the global economy.

     II.  Domestic economic and financial conditions

1. From the beginning of 2022, despite Omicron-driven disruptions to the domestic economy, consumers largely remained willing to spend, and the retail and food/beverage sectors registered growing sales. In addition, bolstered by thriving global economic activity, solid demand for emerging technology applications and digital transformation-related products, growth momentum for exports remained strong and capital equipment imports continued to increase, leading to a robust expansion in the domestic economy. Going forward, private consumption growth is likely to gather pace, and exports and private investment will continue picking up. Nevertheless, given the higher comparison base and the impact of the Russia-Ukraine conflict, the domestic economy is likely to register moderate growth. The Bank forecasts that Taiwan's economy would expand by 4.05% in 2022 (Appendix Table 1).

   In the labor market, the unemployment rate continued to fall and the number of employed persons increased further, both close to the level before the massive coronavirus outbreak in mid-2021. The average regular nominal earnings of all payroll employees in the industrial and services sectors recorded mild annual growth, with those of all payroll employees in the pandemic-distressed services sector also on the rise as the coronavirus wave receded. This indicates a more even recovery across sectors.

2. For the first two months of 2022, the consumer price index (CPI) posted an average annual growth rate of 2.60%, a still fast pace mainly because of domestic fuel price hikes following international oil rallies and cost-pushed price increases for food away from home, as well as rising prices for fruit, durable consumer goods, and flight tickets. For the same period, the core CPI (excluding fruit, vegetables, and energy items) rose by 2.03% year on year.

   The global supply chain bottleneck was expected to persist for some time, while international commodity prices such as oil, grains, and base metals soared as a result of Russia's invasion of Ukraine. These could drive up domestic prices for energy, food, and durable consumer goods, thereby stoking inflationary pressures. The estimates show that the CPI annual growth rates would remain above 2% in the first three quarters of the year, before slowing to below 2% in the fourth quarter. For the year as a whole, the Bank projects the CPI and core CPI annual growth rates to be 2.37% and 1.93%, respectively (Appendix Table 2).

3. In recent months, banks' excess reserves stayed somewhat above NT$60 billion. The annual growth rate of M2 (on a daily average basis) slowed from 8.24% of the fourth quarter of 2021 to 7.87% of January 2022. Loans and investments by the banking sector continued to expand, posting an annual growth rate of 8.75% in January; among them, SME loans increased by 11.52% year on year. Meanwhile, short- and long-term market interest rates fluctuated within a tight range. Overall, financial conditions were accommodative.

    III.  Interest rate decision: Raising the policy rates by 25 basis points

The Board considered the economic and financial conditions at home and abroad in today's meeting. Myriad uncertainties facing the global economic outlook could dampen the domestic growth momentum. For the domestic inflation outlook, however, the recent Russia-Ukraine conflict and the consequent price surges in global energy items and other commodities impose considerable imported inflation pressures. The annual growth rate of the CPI has stayed over 2% for consecutive months and will likely remain so towards the third quarter of the year, while that of the core CPI has also increased, both pointing to a persistent trend of elevated inflation. Furthermore, the domestically-oriented services sector that took a greater hit from the pandemic has gradually rebounded and the labor market conditions have continued to improve. Meanwhile, some economies, including the United States, have begun to raise policy rates. In this view, the Board judged that a rate hike would help contain domestic inflation expectations and achieve the policy objectives of price stability and sound financial and economic development.

The Board decided unanimously at the meeting today to raise the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations to 1.375%, 1.75%, and 3.625%, respectively, effective March 18, 2022.

Given that global inflation still faces conspicuous upside risk, the Bank will keep close watch on developments related to international raw material prices, monetary policy actions by major economies, and geopolitical risks, and how these factors affect domestic prices and economic and financial conditions. Based on the assessments thereof, the Bank may adjust its monetary policy timely and appropriately to fulfill the statutory duties of maintaining price stability, safeguarding financial stability, and fostering economic development.

4. The Special Accommodation Facility's interest rate on re-accommodations to banks: Maintained at the current level of 0.1% until June 30, 2022 to ensure funding ease for SMEs after the policy rate hike

Under the Bank's Special Accommodation Facility to Support Bank Credit to Small and Medium-Sized Enterprises (SMEs) launched in April 2020, financial institutions have approved preferential loans to more than 300 thousand borrowers with the total amount exceeding NT$500 billion. While the Facility has been productive in helping the pandemic-hit SMEs obtain essential funds, the need for financial relief diminished as firms gradually resumed normal operations amid successful containment of the domestic coronavirus situation. In this light, the Facility was closed for new SME loan applications after December 31, 2021, but the preferential rates would remain applicable until June 30, 2022 as previously announced. Likewise, the Facility's accommodations to the banking sector were also rolled over to the same date, before which a total amount of around NT$400 billion would be repaid to the Bank.

In line with this policy rate hike, which could have affected the funding costs of the SMEs utilizing the Facility, the Bank would therefore amend the relevant regulations1 so that the rate on the special accommodations to banks would remain at 0.1%, allowing the SME borrowers to continue enjoying preferential loan rates supported by the Facility.     

5. Introduced in December 2020, the Bank's selective credit control measures have been adjusted as needed with three more amendments, representing sustained efforts to achieve effective allocation and reasonable utilization of credit resources as per the government's Healthy Real Estate Market Plan. Since the implementation, they have successfully held down the expansions in construction loans and housing loans and reined in real estate loan concentration, conducive to reducing credit risk and promoting sound banking operations. The Bank will stay attentive to the developments in real estate lending and in the housing market, continue to review the implementation of the selective credit controls, and make adjustments as needed in order to promote financial stability.

6. 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.