Monetary Policy Decision of the Board Meeting (2024Q2)

      I. Global economic and financial conditions

Since the Board met in March this year, indicators have pointed to continuous expansion in the global manufacturing and services sectors. Nevertheless, the effects of major economies' monetary tightening and ongoing geopolitical conflicts have continued to dampen global economic growth momentum. Meanwhile, inflation rates in major economies have come down rather slowly because of stickiness in the prices of services. International institutions forecast mild global economic growth and further yet slow declines in global inflation this year.

As the economic performance and the progress of disinflation varied across major economies, the pace of their monetary policy adjustments also diverged. The US Federal Reserve kept the policy rate unchanged, while the European Central Bank pivoted to a rate cut last week. The Bank of Japan moved towards monetary policy normalization, and the People's Bank of China continued with its accommodative monetary policy stance. Market expectations of the timing for major central banks to adjust their monetary policy stance added to the volatility in international financial markets.

Looking ahead, a string of key factors such as major economies' monetary policy moves, geopolitical risks, climate change, the pace of China's economic recovery, global economic fragmentation, and supply chain restructuring could weigh on international economic and financial outlooks.

     II. Domestic economic and financial conditions

1. During the first quarter of the year, strong demand for emerging technology applications such as artificial intelligence (AI) significantly bolstered Taiwan's export growth. Meanwhile, private consumption rose steadily, and private investment posted a smaller contraction. As a result, the domestic economy expanded at a faster-than-expected pace. For the second quarter, the economy was expected to exhibit solid growth, with data in recent months showing a rebound in private investment as well as continuous growth in exports and private consumption. In terms of labor market conditions in the year to date, the unemployment rate registered lower than that in the same period last year, the number of employed persons increased, and nominal total payroll earnings rose faster.

Looking into the second half of the year, private consumption will likely continue with mild growth, while a rebound in global final demand and the ever-brightening business prospects of emerging tech applications are both expected to buttress export growth momentum and boost private investment. Nonetheless, a higher base effect can cause the economic growth rate to register lower in the second half of the year than the first half according to the Bank's projections. For the year as a whole, the Bank has raised the forecast for the GDP growth rate to 3.77% (see Appendix Table for the forecasts by major institutions), up from the March projection of 3.22%.  

2. For the first five months of the year, the annual growth rate of the consumer price index (CPI) averaged 2.24%, mainly reflecting increases in the prices of food (particularly food away from home and fruit) and housing rent, as well as uptrends in the prices of personal effects and entertainment services. The annual growth rate of the core CPI (excluding vegetables, fruit, and energy items) continued slowing down gradually, averaging 2.06% during the same period.

For the outlook of the second half of the year, with services inflation easing further, the Bank expects the inflation rate to gradually come down in the second half of the year. For the year as a whole, the annual growth rates of the CPI and core CPI are forecasted to be 2.12% and 2.00%, respectively, lower than 2.49% and 2.58% last year (see Appendix Table for the forecasts by major institutions). Factors likely to influence the future path of domestic inflation include price trends of international commodities and domestic services, as well as weather conditions.

3. Banks' excess reserves averaged slightly above NT$45 billion for the two months of March and April. For the first four months of the year, the average annual growth rate of M2 (measured on a daily average basis) slightly rose to 5.81% from 5.44% in the fourth quarter last year. The average annual growth rate of bank loans and investments also increased from 6.26% in the fourth quarter last year to 7.32% in the first four months this year. Both money market interest rates and bank deposit and lending rates rose in line with the Bank's policy rate hike in March this year, the sixth in this tightening cycle.

3. The Board decided unanimously to keep the policy rates unchanged, to adjust the selective credit control measures, and to raise the reserve requirement ratios by 0.25 percentage points

At the meeting today, the Board considered the balance of incoming data on economic and financial conditions at home and abroad. The domestic inflation rate has gradually come down in the year to date and would continue to ease to around 2% in the second half of the year. Meanwhile, the domestic economy would likely expand at a moderate pace this year and the output gap is expected to be modestly negative. Against this background, the Board judged that a rate hold would help foster sound economic and financial development on the whole.

The Board decided to keep the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations unchanged at 2%, 2.375%, and 4.25%, respectively.

Going forward, the Bank will stay attentive to the developments in domestic inflation and keep watch on incoming information regarding monetary policy paths of major central banks, China's economic recovery, international raw material prices, geopolitical risks, and extreme weather to assess their implications for Taiwan's economic activity and financial conditions. Based on such assessment, 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 aforementioned objectives.

4. The Bank has made five amendments to its selective credit control measures since December 2020, which have helped banks mitigate risks associated with real estate lending. The nonperforming loan ratio of real estate loans has since remained low, indicating good credit quality.

Nevertheless, housing market transactions began to pick up in the second half of last year, leading to a continuous upturn in the annual growth rate of housing loans. As a result, the ratio of real estate lending to total lending of all banks remains elevated. Moreover, since the June 2023 introduction of a 70% loan-to-value (LTV) ratio cap on natural persons' second outstanding home loans for housing in the designated specific areas, this loan bracket has seen its loan disbursement amount on the rise. Therefore, to further enhance management of bank credit resources and reduce related credit risk, the Bank decided to amend the Regulations Governing the Extension of Mortgage Loans by Financial Institutions to lower the aforementioned LTV ratio cap on natural persons' second outstanding home loans for housing in the specific areas to 60%, effective June 14, 2024 (Appendix 1).

In addition, the Bank judged that a concurrent hike in reserve requirement ratios would reinforce the effect of the above credit control measures via enhanced quantity management of money and credit, thereby helping to further contain excessive credit flows into the real estate market. The Board thus decided to raise the reserve requirement ratios on NT dollar passbook and time (savings) deposits by 0.25 percentage points, effective July 1, 2024 (Appendix 2).

In the future, the Bank will continue reviewing the status of banks' real estate lending and the effectiveness of relevant credit control measures, closely monitor potential impacts of real estate sector-related policies on the housing market, and adjust the measures 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 irregular factors (such as massive inflows/outflows of short-term capital) and seasonal factors 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 duties, will step in to maintain an orderly market.