Monetary Policy Decision of the Board Meeting (2022Q2)

      I. Global economic and financial conditions

Since the Board met in March this year, the continued Russia-Ukraine conflict has pushed up commodity prices and the strict pandemic-related restrictions in China have exacerbated international supply chain bottlenecks, significantly heightening global inflationary pressures. Meanwhile, further policy rate hikes by central banks in major economies like the US have induced tighter financial conditions. As a result, it is expected that growth momentum for the global economy is likely to soften this year. Recent global financial market turbulence has also intensified in the wake of monetary tightening in major economies. International institutions have further downgraded their forecasts for the 2022 global economic growth and revised this year's global inflation forecasts upwards.

Looking ahead, the global economy is still clouded by multiple downside risks, mainly including the Russia-Ukraine conflict, inflation expectations likely being pushed up by high global inflation, a slowdown in China's economic growth, and tightening international financial conditions, which could weigh on global production as well as economic and trade activity. Moreover, recurring COVID-19 pandemic outbreaks would also add to uncertainties to the global economy.

    II. Domestic economic and financial conditions

1. In the first quarter of the year, bolstered by growth in exports and private investment, the domestic economy expanded at a solid pace. The manufacturing sector showed steady expansion, while the services sector gradually recovered. In terms of labor market conditions, the unemployment rate fell slightly compared to the same period of the previous year, whereas the number of employed persons recorded a modest year-on-year decrease. As inflation was elevated, the average real total earnings of all payroll employees in the industrial and services sectors only registered marginal growth, and there remained a pronounced difference in wage growth across sectors.

The domestic COVID-19 resurgence since mid-April caused companies to institute more furloughs and consumers to shun away from dining out and travel. As a result, consumer spending slumped, and the recovery of domestically-oriented services sector faltered.

Looking ahead to the second half of the year, though the global economic expansion is likely to moderate, it is expected that continued demand for emerging technology applications and digital transformation-related products would buttress Taiwan's export growth. Private investment is projected to extend the uptrend and government consumption is also set to increase, while private consumption would gradually pick up once the domestic coronavirus outbreak eases. The Bank forecasts Taiwan's economy to grow by 3.75% this year (Appendix Table), lower than the March forecast of 4.05%.   

2. From the beginning of 2022, domestic prices of food and oil related products were pushed up by rising import costs and domestic harvests of fruit and vegetables were restrained by unfavorable weather conditions, leading the consumer price index (CPI) annual growth rate to trend upwards. For the first five months of the year, the annual growth rates of the CPI and core CPI (excluding fruit, vegetables, and energy items) averaged 3.04% and 2.33%, respectively. The Bank expects the inflation rate to gradually come down in the second half of the year, but still at elevated levels. For the year as a whole, the Bank revises the CPI and core CPI annual growth rate projections upwards to 2.83% and 2.42%, respectively (see Appendix Table).

3. Recently, banks' excess reserves stood around NT$70 billion. The annual growth rate of bank loans and investments averaged 8.62% for the first four months of the year, while that of M2 (on a daily average basis) registered 7.94% for the same period. Meanwhile, short- and long-term market interest rates both rose higher.

3.  Monetary policy decisions: Raising the policy rates by 0.125 percentage points and raising the reserve requirement ratios by 0.25 percentage points

In today's meeting, the Board considered these developments in domestic and foreign economic and financial conditions. Given mounting pressures of imported inflation fueled by rising international commodity prices, domestic inflation is expected to remain elevated. Meanwhile, as the recent surge of COVID-19 inflections at home disrupted the recovery of domestically-oriented services sector, private consumption growth would likely weaken. In addition, shrouded by downside risks, a more subdued global economic outlook could further weigh on Taiwan's growth momentum.        

The Board judged that raising both the policy rates and the reserve requirement ratios would send a clear message that the Bank continues to adopt a monetary policy stance of tightening. This will help strengthen the policy effects and rein in domestic inflation expectations, so as to 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 1.5%, 1.875%, and 3.75%, respectively, effective June 17, 2022.

The Board also decided unanimously to increase the reserve requirement ratios on NT dollar demand deposits and time (savings) deposits by 0.25 percentage points each (see Appendix for the requirements by type of deposits), effective July 1, 2022.

Against the backdrop of intense inflationary pressures and significant downside risks faced by the global economy, the Bank will keep close watch on the implications for domestic price trends resulting from the Russia-Ukraine conflict and other geopolitical risks, international commodity price movements, and the global pandemic progress, while also closely monitor how the monetary policy tightening of major economies would affect economic and financial conditions at home and abroad. Based on the assessments thereof, the Bank may adjust its monetary policy timely and appropriately to fulfill the statutory duties of maintaining financial and price stability, and fostering economic development within the scope of the above objectives.

4. The Bank's selective credit control measures, first introduced in December 2020 and adjusted later for three times, have so far successfully slowed down the expansion of construction and housing loans and kept real estate loan concentration broadly steady, thereby bolstering banks' credit risk management. As the government's cross-agency efforts proceeded further under the Healthy Real Estate Market Plan and the renewed pandemic waves created additional concerns, trading in the housing market has cooled somewhat for the year to date, and the annual growth rates of building ownership transfers in the entire nation and in the Six Special Municipalities both declined to negative territory recently. Moreover, the monetary policy tightening would also boost the effectiveness of the existing credit controls. The Bank will stay attentive to the developments in real estate lending and continue to review the implementation of the selective credit control measures, and make adjustments as needed in order to promote financial stability.      

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.