Monetary Policy Decision of the Board Meeting

      I. Global economic and financial conditions

Since the Board met in December last year, global economic and trade momentum has moderated, prices of commodities such as international crude oil have exhibited a downtrend, and global inflation has fallen back down gradually. Recently, major central banks have continued with monetary policy tightening, whereas some central banks have slowed or paused the pace of policy rate hikes based on the assessment of economic prospects and cumulative effects from previous rate rises. Nevertheless, in view of inflationary pressures remaining elevated in major economies, high interest rates could persist for an extended period. Global economic growth is expected to slow further in 2023.

Looking ahead, the monetary tightening effect from drastic rate hikes by major central banks in the US and Europe may spill over to other economies, intensifying downside risks to the world economy. Meanwhile, tight labor markets in the US and Europe and fragmentation of the global economy could make it difficult to ease inflationary pressures. In addition, the pace of China's economic recovery, climate change, and geopolitical risks could weigh on commodity prices, increasing uncertainties over global inflation trends.

Recent concerns over the turbulence in the banking sectors of the US and Europe and the ensuing effects on market expectations about the size of rate hikes by major central banks have heightened volatility in international financial markets. The outlook for global financial stability warrants close attention.

     II. Domestic economic and financial conditions

1. From the beginning of 2023, with the easing of pandemic-related restrictions and border controls, domestic consumer economic activity gradually returned to normal, consumer confidence stabilized, and the retail and food/beverage sectors registered growing sales. However, as waning global final demand prompted businesses to continue with inventory destocking, Taiwan's exports have witnessed negative growth for consecutive months and private investment has also turned conservative. In terms of labor market conditions, the overall unemployment rate dropped, yet the number of furloughed employees in the manufacturing sector increased.

The economy is expected to grow modestly in the first half of this year, restrained by weak export and investment growth. For the second half of the year, despite sluggish investment growth, exports would likely regain momentum from reduced inventory levels in global supply chains, while domestic demand continues to firm up thanks to solid private consumption growth and the government's newly-launched initiative to promote post-pandemic economic resilience and to share growth results nationwide with a universal surplus tax rebate program; it is therefore expected that economic growth would rebound in the latter half of 2023. The Bank revises its GDP growth forecast downward to 2.21% in 2023 (Appendix Table 1), a pace slower than the 2.45% in 2022.

2. The annual growth rate of the consumer price index (CPI) averaged 2.74% for the first two months of the year owing mainly to price rises in food (such as food away from home) and services for entertainment as well as higher rent. The annual growth rate of the core CPI (excluding fruit, vegetables, and energy items) averaged 2.77% for the same period, edging down continuously since entering the second half of last year.

For year 2023 as a whole, as global supply chain bottlenecks are likely to be resolved and raw material prices (including crude oil) are projected to trend lower than 2022, it is expected that domestic inflation would also gradually cool down. Nonetheless, with resumption of normal life post the pandemic likely to bolster prices of services for entertainment, the global outbreak of avian flu pushing up domestic food prices, and electricity rates hiked markedly, the Bank therefore upgrades its forecasts for this year's CPI and core CPI annual growth rates to 2.09% for both (Appendix Table 2), lower than the previous year's 2.95% and 2.61%. However, this outlook could still change depending on prices trends of international commodities and domestic services, as well as weather events.

3. Banks' excess reserves stayed slightly above NT$60 billion on average for the first two months of the year. The annual growth rate of M2 (measured on a daily average basis) averaged 6.73% in the first two months of 2023, slowing from the 7.25% of the fourth quarter of 2022. Bank loans and investments also decreased from 6.66% to 5.45%. Reflecting the Bank's monetary tightening, interest rates on bank deposits and loans rose higher and money market rates all trended up. Furthermore, Taiwan's banking system remains sound, well-capitalized, and flush with liquidity, which would help ward off destabilizing effects from the recent global financial market turmoil.

     III. Monetary policy decision: The Board reached a unanimous decision to raise 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. The international economic outlook still faces many uncertainties and Taiwan's exports and investments would slow this year. Nonetheless, steady private consumption growth and a rebound in export momentum are expected to drive economic expansion in the second half of the year; for the year as a whole, the economy is projected to post mild growth. In terms of inflation, the domestic inflation rate is on track to come down this year, with the CPI and core CPI annual growth rates both forecasted to be 2.09%; however, uncertainties remain for this outlook, and higher-than-usual domestic price gains in recent years could buoy up inflation expectations. To rein in inflation expectations, the Board judged that a continued policy rate hike will help achieve 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 1.875%, 2.25%, and 4.125%, respectively, effective March 24, 2023.

Looking ahead, the Bank will continue to monitor the cumulative effects from its monetary tightening since 2022 as well as the spillover of monetary policy moves by major economies and keep close watch on the fallout from the recent debacles in some US and European banks. The Bank will take these into account in assessing the implications for domestic economic and financial conditions and 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, growth in banks' construction and housing loans continued to slow, real estate lending as a share of total lending has broadly held steady, 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 continuous monetary policy tightening since March 2022. More results are also to emerge gradually as government agencies are making headway with their policy efforts under the Healthy Real Estate Market Plan and improving relevant mechanisms and measures. In recent months, housing market transactions have decreased considerably and housing price uptrends have moderated. Going forward, 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.