Monetary Policy Decisions of the Board Meeting

I.       At the meeting today, the Board reached the following decisions:

1.     The Board decided to maintain the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral at the current levels of 1.875%, 2.25%, and 4.125%, respectively.

2.     The Board set the target range of M2 growth at 2.5% to 6.5% for 2013 (Appendix).

II.    The decisions are based on the following:

1.     Recent developments point to signs of stabilization for the global economy, with an improved outlook for 2013. The eurozone recession has eased and the US economy looks set for moderate expansion. China has regained growth momentum and Asian emerging economies also see a rebound in prospect. Nonetheless, uncertainties surrounding the US fiscal cliff and the European sovereign debt crisis still pose risks. 

The moderate recovery of the global economy also led international forecast agencies to project a lower price level for oil in 2013. As a result, global inflationary pressures are expected to be alleviated.

2.     According to the November projections by the Directorate-General of Budget, Accounting, and Statistics (DGBAS), Taiwan's economic growth was estimated to improve to 2.97% in the fourth quarter of this year from the previous quarter's 0.98%. Exports and private investment are likely to revive on the back of a gradual global economic recovery next year, while consumption growth remains steady. The domestic economy is forecast to expand by 3.15% in 2013, with a somewhat mild growth momentum. Despite a marginally higher unemployment rate, the number of persons employed actually increased in October.     

3.     International raw material prices have stabilized recently. The DGBAS forecast Taiwan's CPI annual growth rate to average 1.93% for the year 2012 as a whole and to ease to 1.27% next year, on account of steady price trends anticipated for international commodities next year and a lower base effect for fruit and vegetable prices (due to this year's weather-related fluctuations).

4.     In view of the gradual recovery, the CBC has conducted open market operations to manage liquidity levels. As of November, banks' excess reserves stood steady at NT$21.6 billion, and the overnight interbank rate remained broadly stable. For the first eleven months of the year, bank loans and investments grew at an annual rate of 5.03%, and the M2 annual growth rate averaged 4.22%, sufficient to fully meet the needs of domestic economic activity and support growth.

In assessing recent developments and future prospects, the Board, pursuant to its statutory mandates, took into consideration the global economic uncertainties, a modest domestic recovery and subdued inflationary pressures. Against such a backdrop, the Board judges that the current policy rate level and the 2013 M2 growth target range will be conducive to maintaining price and financial stability and promoting economic growth. Looking ahead, the CBC will continue to closely monitor the evolution of global and domestic economic and financial conditions, and undertake appropriate monetary policy actions in a timely manner as warranted.

III. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, 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 CBC will step in to maintain an orderly market. 

Appendix

Explanatory notes on the M2 growth target for year 2013

1.     For the first eleven months of 2012, the annual growth rate of M2 averaged 4.22%, 0.28 of a percentage point lower than the 4.5% median. This was mainly due to slower growth in bank loans and investments amid a weaker business climate, and net domestic residents capital outflow.

2.     By incorporating into simulation the DGBAS' latest projections of economic growth (3.15%) and CPI inflation (1.27%) for next year, the CBC estimates the annual increase in the demand for M2 will be 4.29% in 2013. Using an increment of 0.5 percentage point and rounding off to 4.5% with a bound of ±2 percentage points to account for the uncertainty factor and error estimates, the M2 growth target range for 2013 is set at 2.5% to 6.5%.

3.     Going forward, a surge in domestic demand for funds is less likely, as the global economy expects a gradual recovery rather than a strong turnaround. Since international economic and financial uncertainties seem yet to recede, cross-border capital movements may become a dominant factor for Taiwan’s M2 growth in the future.