Monetary Policy Decision of the Board Meeting (2022Q3)
Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: September 22, 2022
Monetary Policy Decision of the Board Meeting (2022Q3)
I. Global economic and financial conditions
Since the Board met in June this year, growth in the US, the euro area, and China has moderated, prices of commodities such as international crude oil have trended downward, and global supply chain bottlenecks have gradually eased, whereas global inflation remains at high levels. With most economies including the US and the European economies continuing with policy rate hikes, leading to a tightening of financial conditions, growth momentum for the global economy is expected to soften and international institutions have downgraded their forecasts for the 2022 global economic growth. Meanwhile, recent developments in US inflation and the Fed's monetary policy stance have sparked a drastic increase in volatility in international financial markets. The US dollar has strengthened, with the international US Dollar Index reaching a 20-year high and major economies' currencies all depreciating against the US dollar.
Looking ahead, the global economy faces multiple downside risks, including the following: (1) aggressive monetary policy tightening by the US and the European economies inducing tighter international financial conditions, which could weigh on global economic activity; (2) the energy crisis fueled by the ongoing Russia-Ukraine war dragging down economic growth in Europe; (3) China's zero-COVID policy affecting the easing of global supply chain bottlenecks and its real estate troubles undermining financial stability. In addition, geopolitical risks, extreme weather events, and the evolution of the COVID-19 pandemic would also add to uncertainties surrounding the global economic and financial outlooks. International institutions project global economic growth to moderate further and inflation to fall back down in the year 2023.
II. Domestic economic and financial conditions
Since around the middle of the year, domestic private consumption has rebounded on the stabilized pandemic situation at home. On the other hand, faltering final demand amid a slowing global economic expansion and the ensuing inventory adjustment by some firms have exerted a drag on Taiwan's export growth and private investment. The Bank trims its forecast for the economic growth this year to 3.51% (Appendix Table 1).
The pandemic's impact on the labor market has waned. The July 2022 figures showed that the number of employed persons increased by 0.29% year on year; the unemployment rate rose to 3.78% owing to seasonal factors but the seasonally-adjusted rate came in at 3.68%, returning to the level before the domestic COVID-19 flare-up in April this year.
Looking ahead to next year, employment and wage growth are likely to benefit from the recovery in domestically-oriented services sector, helping to extend the uptrend in private consumption. Meanwhile, the global economic moderation could dampen growth momentum for Taiwan's exports and private investment. For the year 2023, the Bank forecasts the economy to expand by 2.90%.
- In recent months, domestic inflation eased on account of the decline in international crude oil and grain prices and local vegetable prices. The annual growth rate of consumer price index (CPI) dropped to 2.66% in August and that of core CPI (excluding fruit, vegetables, and energy items) edged down to 2.73%. For the first eight months, the CPI and core CPI annual growth rates averaged 3.10% and 2.49%, respectively. Given the softening in international raw material prices and the effect of a higher comparison base, the Bank expects the domestic inflation rate to gradually come down, with the CPI and core CPI annual growth rates at 2.95% and 2.52%, respectively, for this year (Appendix Table 2).
Looking ahead to next year, global supply chain bottlenecks would likely be gradually alleviated and international institutions mostly anticipate a price downtrend for crude oil and other raw materials. The Bank projects the CPI and core CPI annual growth rates to drop to 1.88% and 1.87%, respectively, in 2023.
- Banks' excess reserves hovered slightly above NT$60 billion recently. For the first eight months of the year, the annual growth rate of bank loans and investments and that of M2 (measured on a daily average basis) were 7.77% and 7.66%, respectively. Short- and long-term market interest rates rose higher following the Bank's monetary tightening this year.
- 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 the following developments in domestic and foreign economic and financial conditions. Given the recent international commodity price decline, the domestic inflation rate is expected to come down gradually in the second half of the year, while registering above 2% for the year as a whole before dropping below 2% next year. Moreover, with a slowing global economy compounded by greater downside risk in the second half of the year through to next year, it is expected that the domestic economic growth momentum would weaken next year. The Board judged that, by continuing with policy rate hikes while also raising the reserve requirement ratios, it would help rein in domestic inflation expectations, maintain price stability, and help attain the policy objectives of fostering sound economic and financial development.
At the meeting today, the Board decided to raise the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations by 0.125 percentage points each to 1.625%, 2%, and 3.875%, respectively, effective September 23, 2022.
The Board also decided 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 October 1, 2022.
Against a backdrop of elevated inflationary pressures and intensified headwinds facing the global economy, the Bank will closely monitor the implications for domestic price trends brought forth by international raw material price movements, geopolitical risks, extreme weather events, and the course of the pandemic worldwide, while also paying close attention to the trajectory of monetary policy tightening in major economies and the effects therefrom on economic and financial conditions at home and abroad. The Bank may adjust its monetary policy accordingly in a timely manner as warranted, so as to fulfill the statutory duties of maintaining financial and price stability, and fostering economic development within the scope of the above objectives.
- The Bank's selective credit control measures, implemented with four successive amendments from December 2020, have so far successfully bolstered credit risk management of the banking sector. In the year so far, banks' construction and housing loans have expanded at a slower pace, real estate loan concentration has been broadly steady, and the level of non-performing loan ratio for real estate lending has been low. The effectiveness of the existing credit controls would also have been amplified by the Bank's monetary policy tightening. In addition, housing market transactions have been dampened somewhat in the year to date as a result of the government's cross-agency efforts under the Healthy Real Estate Market Plan and the pandemic flare-up in recent months. The Bank will actively keep track of 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.
- While the currencies of major economies and the NT dollar have all depreciated against the US dollar so far this year, the NT dollar exchange rate has experienced comparatively less volatility. The Bank will keep close watch on international financial conditions and the trends of cross-border capital flows. In the event of 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.