Monetary Policy Decision of the Board Meeting (2024Q3)

1. Global economic and financial conditions

Since the Board met in June this year, the global manufacturing sector has weakened to tepid growth, while the services sector has witnessed continuous expansion. The global economy has sustained mild growth. In more recent months, international oil and other commodity prices trended down, services price rises moderated, and global inflation further eased.

From mid-2024 onwards, monetary policy paths of major central banks continued to diverge. The European and US central banks started their rate-cut cycles successively to avoid excessive tightening. The People's Bank of China continued with its expansionary monetary policy stance on concern of mounting deflationary risk. The Bank of Japan delivered another rate increase thanks to a virtuous cycle between prices and wages. Market attention to major central banks' monetary policy moves has induced greater volatility in international financial markets.

For the outlook of 2024 and 2025, international institutions projected the world economy to grow at a moderate pace and the inflation rate to drop further. However, the international economic and financial outlooks are still shrouded in many uncertainties, such as varied paces in monetary policy moves of major central banks, geopolitical changes following the US presidential election, and the spillover effect of China's softening economy, as well as climate change and other potential impacts.

2. Domestic economic and financial conditions

1. In the months since midyear, Taiwan's exports have recorded solid growth, supported by robust demand for artificial intelligence and other emerging technology applications. With regard to domestic demand, private investment gained stronger momentum with capital equipment imports increasing significantly in recent months, and private consumption continued growing. Nevertheless, owing to a higher base effect, the Bank forecasted Taiwan's economy to expand by 1.99% for the second half of the year. The Bank's GDP growth forecast for the year as a whole was 3.82% (see Appendix Table 1 for the forecasts by major institutions). In the labor market, the number of employed persons continued increasing in recent months, the unemployment rate registered lower than that in the same period last year, and total nominal earnings posted mild growth.

For the outlook of next year, a pickup in global goods trade growth and the continuous boom in emerging tech applications would continue to bolster growth in Taiwan's exports and private investment. Meanwhile, as minimum wage and public sector pay were scheduled to be raised next year, private consumption is expected to enjoy further growth. Therefore, the Bank forecasted the economic growth rate to be 3.08% in 2025.

2. Regarding price trends since June 2024, weather-induced surges in the prices of fruit and vegetables led to a brief upswing in the annual growth rate of the consumer price index (CPI) followed by a decline. The annual growth rate of the core CPI (excluding vegetables, fruit, and energy items) continued slowing down gradually. For the first eight months of the year, the average annual growth rate of the CPI was 2.32% and that of the core CPI was 1.97%. The Bank expected that the inflation rate in the second half of the year would be slightly lower than the first half. For year 2024, the Bank forecasted the CPI and the core CPI annual growth rates to register 2.16% and 1.94% respectively (see Appendix Table 2 for the forecasts by major institutions), lower than the 2023 figures of 2.49% and 2.58%.

For year 2025, the Bank forecasted Taiwan's CPI and core CPI annual growth rates to slow further to 1.89% and 1.79% owing to a stable outlook for international oil prices as expected by international institutions and the prediction of continuous gradual easing in domestic services price increases. 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. Domestic market liquidity was ample, and both long- and short-term market interest rates fluctuated within a narrow range in recent months. Banks' excess reserves averaged slightly above NT$45 billion for the three months from June to August. For the first eight months of the year, the average annual growth rate of the monetary aggregate M2 (measured on a daily average basis) was 5.94% and that of bank loans and investments was 7.73%, both deemed sufficient to support economic activity.

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

1. At the meeting today, the Board considered the totality of information on the economic and financial conditions at home and abroad. Domestic inflation has been gradually easing in the year to date and would likely come down to below 2% next year. In addition, the domestic economy is expected to continue expanding at a moderate pace both for the second half of this year and for next year, with a modestly negative output gap for both years. 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 the implications of monetary policy moves of major central banks, China's economic downturn risk, geopolitical risks, and extreme weather for Taiwan's economic activity and financial conditions. The Bank will 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 aforementioned objectives.

2. The Bank has made six 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 climb back up and housing prices saw steeper rises in the second half of last year, leading the annual growth rate of housing loans to trend upwards continuously to 11.0% at the end of August this year, the highest since May 2006. Furthermore, the annual growth rate of construction loans also picked up, reaching 5.0% at the end of August. As a result, the ratio of real estate lending to total lending of all banks (a measure of concentration of real estate lending) stayed elevated at a level of 37.5% at the end of August this year, close to its historical record of 37.9%.

The Bank successively met with a total of 34 domestic banks between August 12 and August 21. Through moral suasion, the Bank asked these banks to draw up a quantitative, self-disciplinary improvement plan covering a one-year horizon to reduce over-concentration of credit resources in loans to the real estate sector. Such plans shall not adversely impact the funding needs of non-homeowners applying for owner-occupied housing loans, or real estate sector entities looking to finance their projects aligned with the government-promoted policies of urban renewal, reconstruction of old and unsafe buildings, and affordable housing, or corporates seeking capital to build or buy own-use plants or offices.* For the coming future, the Bank will regularly examine the effectiveness of these plans and conduct on-site inspections to ensure successful execution by the banks.

In order to further reinforce management of banks' credit resources and to contain housing market speculation and property hoarding, while prioritizing the channeling of credit resources towards non-homeowners seeking owner-occupied housing, the Bank decided to make the following amendments to the Regulations Governing the Extension of Mortgage Loans by Financial Institutions, effective September 20, 2024. The primary points to this amendment are as follows (Appendix 1):  

(1)Granting no grace period to a natural person's first outstanding home loan when the borrower already owns building(s) to his/her name.

(2)Lowering the cap on the loan-to-value (LTV) ratio, from 60% to 50%, of natural persons' second outstanding home loans and widening the applicable scope (from housing in the designated ''specific areas'') to housing nationwide.

(3)Lowering the LTV ratio caps on corporate entities' housing loans, natural persons' high-value housing loans, and natural persons' third (or more) outstanding home loans from 40% to 30%.

(4)Lowering the LTV ratio cap on unsold housing unit loans from 40% to 30%.

In addition, the Bank judged that a concurrent hike in reserve requirement ratios would reinforce the effect of the Bank's moral suasion and the above selective credit controls 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 October 1, 2024 (Appendix 2).

In the future, the Bank will continue reviewing the status of banks' real estate lending and the effectiveness of the Bank's 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.

4. 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.

Notes: * For more details, please refer to the Bank's press releases as follows (in Chinese):

1. The August 21, 2024 press release entitled “The Bank Recently Met with 34 Domestic Banks to Request for Self-Disciplinary Management of the Outstanding Balance of Real Estate Loans in a Joint Effort to Improve Over-concentration of Credit Resources in Real Estate Lending,” at https://www.cbc.gov.tw/tw/cp-302-175172-6f024-1.html. 
2. The August 22, 2024 press release entitled “Supplementary Notes on the Bank's Recent Request for Self-Disciplinary Management by Domestic Banks over the Outstanding Balance of Real Estate Loans,” at https://www.cbc.gov.tw/tw/cp-302-175204-6c020-1.html.