Monetary Policy Decision of the Board Meeting

I. At the meeting today, the Board decided unanimously to keep the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral unchanged at 1.875%, 2.25%, and 4.125%, respectively.

II. The decision is based on the following:

1. Economic growth in advanced economies has recently gathered some momentum, while emerging economies such as China have stabilized. International forecasters have projected a pick up in the global economic outlook. However, the issues of the US debt ceiling and the Federal Reserve’s withdrawal from quantitative easing, coupled with volatile cross-border capital flows, have increased financial instability in some emerging economies. Consequently, uncertainty in both global financial stability and economic recovery has been heightened.

2. Taiwan's exports registered mild growth amid stabilizing demand from the US, Europe, and China, while private consumption and investment were both muted. According to the August forecast by the Directorate-General of Budget, Accounting, and Statistics (DGBAS), Taiwan's economy will grow by 2.61% year on year in the fourth quarter of 2013, slightly higher than the 2.47% projected for the third quarter. Economic expansion will likely post an annual rate of 2.31% for 2013, before strengthening to 3.37% in 2014 as global economic expansion spurs export growth. In the labor market, employment conditions continued to improve, reflecting further increases in the number of employed persons.

3.For the first eight months of the year, the CPI annual growth rate averaged 0.87%. With the supply of fruit and vegetable constrained by typhoons and torrential rain in recent months, the DGBAS projected a slightly higher inflation rate of 1.64% for the fourth quarter and 1.07% for the year as a whole. In view of gentle inflationary pressures across the globe due to moderate economic recovery and stable international raw material prices, the DGBAS forecast the CPI annual growth rate to average 1.39% for the year 2014.

4.The Bank has continued to manage market liquidity to maintain bank reserves at an appropriate and accommodative level. The overnight interbank call-loan rate stays broadly stable, and the long-term interest rates have trended upwards as a result of a rebound in US government bond yields. The real interest rate also turned positive (See the appended table).

In sum, the domestic economy has expanded moderately, and inflationary pressures are subdued. On the other hand, global economic recovery is proceeding at a gradual pace, and uncertainty in the global economic outlook remains. Against this backdrop, the Board judged that the current policy stance is conducive to price and financial stability as well as economic growth. The Bank will continue to closely monitor the economic and financial developments both at home and abroad and undertake appropriate monetary policy actions in a timely manner.

III. Since the beginning of 2013, the monthly figures of new housing loans extended by Taiwan's five leading banks have been mostly lower compared to the same period a year ago (See the appended figure). In addition, as a result of macro-prudential measures adopted by the Bank, banks have effectively reinforced their risk management for real-estate lending. Going forward, the Bank will keep a watchful eye on banks' management of mortgage-related risks. In the mean time, since mortgage payment as a percentage of household income has exceeded 30%, borrowers are advised to be mindful of risks stemming from future interest rate changes.

IV. Massive foreign capital movements in and out of Taiwan have impacted the NT dollar exchange rate. 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 Bank, in line with its statutory mandate, will step in to maintain an orderly market.