Monetary Policy Decision of the Board Meeting

       I. Global economic and financial conditions

Since the Board met in March this year, the cumulative tightening effects of continuous rate hikes by major central banks in the US and Europe have weakened global final demand and resulted in a tepid performance in the manufacturing sector. Nevertheless, the lifting of pandemic-related restrictions in most countries has supported a rebound in the services sector. Against such a background, commodity prices have registered a narrower increase because of cooling demand, whereas services price increase have remained stubbornly strong as a partial shift of consumer demand from commodity to services boosted demand for food/beverage and entertainment services and the related imbalance between services labor supply and demand also pushed up labor costs. As a consequence, global inflation has trended down at a rather gradual pace.

Recently, some central banks continued raising policy rates, yet a few central banks paused the pace of rate hikes in order to assess the cumulative effects of this monetary tightening cycle on economic activity and inflation. In view of inflationary pressures in major economies remaining elevated, interest rates could stay at restrictive levels for a considerable time. It is therefore expected that global economic and trade growth momentum would remain sluggish.

Looking ahead, the global economic and financial outlooks are still shrouded in many uncertainties, such as the duration of policy rates of major economies staying high, the degree of tightening of global financial conditions, the pace of China’s economic recovery, geopolitical risks, and climate change.

      II. Domestic economic and financial conditions

1. For the first quarter of the year, private consumption picked up as life gradually returned to normal as domestic pandemic-related restrictions and border controls were further relaxed. Nevertheless, a sluggish global economy and continued inventory reductions in supply chains caused Taiwan's exports to decrease even more markedly, while growth in private investment also turned negative. Overall, the annual GDP growth rate slowed to -2.87% in the first quarter. Thereafter, despite continued weakness in exports and private investment in recent months, an expansion in private consumption was expected to bolster economic growth for the second quarter. Meanwhile, labor market conditions improved with the unemployment rate coming down and the number of employed persons rising further. In the year so far, nominal total earnings in the services sector rose over the same period last year thanks to post-pandemic resurgence in face-to-face consumption activity, whereas the manufacturing sector, hit by shrinking exports, posted slower year-on-year earnings growth and experienced an increase in the number of furloughed employees.  

For the outlook of the second half of 2023, while private consumption is likely to continue growing steadily, exports would also gradually gather steam amid a stabilizing global economy and demand for emerging technology applications. The Bank expected Taiwan's economic growth to accelerate in the second half of the year compared to the previous half. For the year as a whole, the economy was forecasted to expand by 1.72% (see Appendix Table for the forecasts by major institutions), down from the March projection of 2.21%.

2. In the months from March onwards, moderating price increases in food items (such as fruit and vegetables) and softening fuel and lubricant fees combined to drive the annual growth rate of the consumer price index (CPI) on a slow downtrend that began in the second half of 2022, taking the inflation rate to 2.02% in May. The annual growth rate of the core CPI (excluding fruit, vegetables, and energy items) was 2.57% in May, a slower descent mainly because of demand-driven price rises in domestic accommodation and food services in the post-pandemic period. For the first five months of 2023, the annual growth rate of the CPI averaged 2.44% and that of the core CPI averaged 2.68%.

Looking at the second half of 2023, it was expected that prices of crude oil and other raw materials would trend below the levels of 2022, bringing down related import prices for Taiwan and thus leading to a further softening in domestic commodity prices. However, domestic services prices stayed elevated owing to price rises in entertainment services and in food away from home, the latter of which reflected higher food ingredients and hiring costs. The Bank therefore forecasted that the inflation rate would continue to come down gradually in the second half of the year, with the headline and core inflation rates projected to slow down to 2.24% and 2.38% (see Appendix Table for the forecasts by major institutions) in 2023 from 2.95% and 2.61% the previous year, while noting that price trends of international commodities and domestic services and the effects of weather events could still affect the domestic inflation outlook in the second half of this year.

3. Banks' excess reserves stayed slightly above NT$60 billion on average for the March-April period. The annual growth rate of M2 (measured on a daily average basis) decreased from 7.25% in the fourth quarter of 2022 to an average of 6.69% in the first four months of 2023. Bank loans and investments further decreased from 6.66% of the fourth quarter of 2022 to 5.55% in the first four months of 2023. Short-term market rates and interest rates on bank deposits and loans both exhibited uptrends following the Bank's March rate hike, the fifth one in this tightening cycle.

    III. Monetary policy decisions: The Board decided unanimously to hold the policy rates steady and to adjust the selective credit control measures 

1. In today's meeting, the Board considered the following assessment of economic and financial conditions at home and abroad. Domestic inflation is expected to come down moderately in the second half of the year, bringing the inflation rate to around 2% in the fourth quarter. Meanwhile, the international economic outlook is confronted by many uncertainties, the domestic output gap would likely turn negative, and the domestic economy is projected to grow at a slower pace than previously forecasted. Taking into account the previous streak of five policy rate hikes and two increases in the required reserve ratios, the Board judged that a rate hold would allow the Bank to assess the cumulative effects and implications of its monetary tightening and would help foster sound economic and financial development on the whole.

At the meeting today, the Board decided to maintain the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations at current levels of 1.875%, 2.25%, and 4.125%, respectively.

Looking ahead, the Bank will continue to monitor the implications for domestic economic activity and financial conditions arising from domestic monetary tightening and from the spillovers of major central banks' rate hikes. Accordingly, the Bank will 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.

2. The Bank has made four adjustments to its selective credit control measures since December 2020. The policy measures have so far effectively helped banks mitigate credit risk associated with real estate lending, reflected by steady slowdown in banks' construction and housing loan growth and the continuously low level of the non-performing loan ratio for real estate lending.

Nevertheless, recent indicators showed that real estate lending still made up a large proportion in total bank lending; in the first quarter of 2023, second home loans taken out by natural persons saw both an increase in number and an expansion in its ratio to total borrowers of newly-extended home loans, compared to the previous quarter; and the loan-to-value (LTV) ratio granted to second home loans taken out by natural persons for homes in the designated ''specific areas'' averaged at high levels and continued rising. In this light, the Bank decided to amend the Regulations Governing the Extension of Mortgage Loans by Financial Institutions with the aim of further strengthening management of bank credit resources and containing related credit risk. The amendments, including the introduction of a 70% cap on the LTV ratio for a second home loan of a natural person for housing in a "specific area," will take effect on June 16, 2023 (see Appendix for more details).

It is expected that more results will continue to emerge as government agencies are making headway with their policy efforts under the Healthy Real Estate Market Plan and improving relevant mechanisms and measures. 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.

4. 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 or disorderly movements in the NT dollar exchange rate with adverse implications for economic and financial stability, the Bank, in accordance with its statutory mandates, will step in to maintain an orderly market.