Monetary Policy Decision of the Board Meeting (2022Q4)

      I. Global economic and financial conditions

Since the Board met in September this year major economies have continued to tighten monetary policy, and the global economy has experienced significantly slower growth. International prices of commodities such as crude oil have mostly exhibited a downtrend, and upside pressures for global inflation have become mildly relieved. As the US and the European economies continued with policy rate hikes, leading to tighter global financial conditions, international institutions forecasted global economic and trade volume growth to decelerate drastically in 2023. With global demand weakening markedly, supply chain bottlenecks easing, and international raw material prices declining, global inflationary pressures are expected to drop next year. Meanwhile, recent developments in US inflation and the Fed's monetary tightening actions have triggered continuous turmoil in international financial markets.

Looking ahead, largely synchronized policy rate hikes by major central banks such as the Fed and the ECB may cause the global economy to register a sharper slowdown, undermine global financial stability, and increase downside risks to the world economy. In addition, a string of factors, including the US-China conflict affecting the development of globalization, extreme weather events, the ongoing war between Russia and Ukraine, and the European energy crisis, could weigh on commodity prices, adding to uncertainties surrounding global inflation trends.

     II. Domestic economic and financial conditions

1. Against a background of diminished impact from the domestic pandemic waves and a gradual lifting of lockdown restrictions in recent months, the unemployment rate decreased further, the number of employed persons edged up, and private consumption steadily recovered. However, sapped by weaker global final demand and ongoing inventory destocking, Taiwan's exports contracted for the third consecutive month, which in turn dampened business sentiment and constrained private investment. The Bank expects the pace of economic growth to slow notably in the fourth quarter this year and downgrades its forecast of Taiwan's GDP growth rate to 2.91% for the year as a whole (Appendix Table 1).

Looking ahead to next year, loosened social restrictions and border controls are likely to boost private consumption. Nonetheless, significant slowdown in global economic and trade activities would hamper export growth for Taiwan, while a cautious business outlook and inventory overhangs might prompt firms to defer investment plans or shrink capital expenditure, weighing on private investment. The Bank expects the economic expansion to moderate to a pace of 2.53% in 2023.

2. Since the middle of the year, international prices of raw materials such as crude oil and grains have softened and domestic prices of food such as vegetables and fruit have posted smaller gains; as a result, the annual growth rate of consumer price index (CPI) trended downwards and registered 2.35% in November. However, the core CPI (excluding fruit, vegetables, and energy items) annual growth rate remained elevated, reaching 2.86% in November. For the first eleven months of the year, the annual growth rates of CPI and core CPI averaged 2.97% and 2.60%, respectively. For the year as a whole, the Bank forecasts the inflation rate and the core inflation rate to be 2.93% and 2.59%, respectively (Appendix Table 2).

Looking ahead to next year, global supply chain gridlocks would likely be resolved and markets expect crude oil and other raw material prices to trend lower than this year. The Bank forecasts the CPI and core CPI annual growth rates to drop to 1.88% and 1.87%, respectively, in 2023. External forecasts by domestic and foreign institutions also project Taiwan's inflation rate to come down next year.

3. Banks' excess reserves stayed around NT$60 billion on average in recent months. For the first ten months of the year, the annual growth rate of bank loans and investments and that of M2 (measured on a daily average basis) were 7.55% and 7.54%, respectively. Alongside the Bank's monetary tightening, interest rates on bank deposits and loans turned higher and money market rates showed an across-the-board uptrend.

    III. Monetary policy decision: Raising the policy rates by 0.125 percentage points 

In today's meeting, the Board considered the following assessment of economic and financial conditions at home and abroad. Although the domestic inflation rate declined in recent months, it is expected to remain above 2% this year before dropping to below 2% next year. Meanwhile, as domestic exports and investment face headwinds from the anticipated global economic downturn compounded by rising downside risks, Taiwan's economy is expected to grow at a slower pace next year. The Board judged that a policy rate hike and continued monetary policy tightening will help rein in domestic inflation expectations, thereby attaining the policy objectives of promoting price stability and fostering sound economic and financial development on the whole.

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 1.75%, 2.125%, and 4%, respectively, effective December 16, 2022.

Looking ahead to next year, with the world to be confronted by intensifying downside economic risks and the path of global inflation still shrouded by uncertainty despite some signs of pressures subduing, the Bank will closely monitor the trajectory of monetary policy moves in major economies, changes in international raw material prices, geopolitical risks, and extreme weather events, to assess their implications for domestic price trends, and economic and financial conditions. Accordingly, the Bank may adjust its monetary policy 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.

4. The Bank's recent round of selective credit control measures, implemented with four successive amendments from December 2020, has so far successfully bolstered credit risk management of the banking sector. In the year to date, banks' construction and housing loans have expanded at a slower pace, real estate loan concentration has improved slightly, and the level of non-performing loan ratio for real estate lending has stayed low. The effectiveness of the existing credit controls have also been amplified by the Bank's monetary policy tightening. Meanwhile, housing market transactions have decreased considerably in recent months amid slower economic growth and a volatile stock market, as well as the government's cross-agency efforts under the Healthy Real Estate Market Plan. The Bank will continuously monitor the developments in housing credit and market, review the implementation of the selective credit control measures, and make adjustments as needed in order to promote financial stability and sound banking operations.       

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.