Monetary Policy Decisions of the Board Meeting

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

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

2. The Board has taken into account the outlook for economic growth and price trends in the coming year and set the target range of M2 growth at 2.5% to 6.5% for 2014.

II. The interest rate decisions are based on the following:

1. Recent developments show that the US economy has expanded at a moderate pace, the eurozone economy has gradually picked up, and the Chinese economy has stabilized. Most international forecast agencies predict the global economy for the year 2014 to deliver a better performance than this year. However, the US Fed's decision to modestly reduce the pace of its asset purchases beginning next year will likely impact emerging market economies. Meanwhile, uncertainties remain for the fiscal challenges in the US and Europe. These factors will play a central role in determining the outlook for global economic recovery.

2. As the global economy is expected to gather pace, driving growth in global trade volume, Taiwan's export growth is anticipated to improve. Private consumption saw a modest rebound; nevertheless, private investment was still lackluster as most industries lacked investment momentum. Against this backdrop, the Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecast the domestic economy to expand by 2.59% in 2014, up from 1.74% this year, yet still below potential output growth. In terms of labor market conditions, employment continued to rise and the unemployment rate declined at a gradual pace, but the issue of structural unemployment needs to be addressed.

3. Global inflationary pressures are mild as lower oil price trends and modest increases in international grains prices are widely anticipated for next year. However, domestic demand grows moderately. Therefore, the DGBAS forecasts a stable outlook for Taiwan's inflation with the CPI annual growth rate to average 1.21% for the year 2014, slightly higher than 0.94% this year.

4. The CBC has continued to manage market liquidity to maintain excess reserves of banks at an appropriate level. Recently, the overnight interbank call-loan rates remained broadly stable. The annual growth rates for the first eleven months of the year were 5.71% for bank loans and investments and 4.69% for M2, both sufficient to support economic activity and foster growth.

Against the backdrop of global uncertainties despite better economic performances, moderate growth in the domestic economy, and muted inflationary pressures, the Board, in keeping with its mandate under the Central Bank Act, judges that the current policy rate level and the 2014 M2 growth target range (2.5% to 6.5%) will help maintain price and financial stability and foster economic growth. Going forward, the CBC 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. To promote financial stability and guide sound banking operations, the CBC has urged banks to exercise caution in real estate lending and has continued to introduce targeted prudential measures since June 2010 and continued to monitor banks' credit risk management.

It has recently been brought to our attention that some banks have made high-valued housing loans without fully complying with the general principles of loan review and credit extension, failing to manage risk properly and observe high ethical standards. A few banks were also found to have inadequate due diligence when approving and reviewing loans collateralized against lands classified for industrial use.

Financial institutions obtain most of their funding from the public and should fulfill their role as intermediaries and protect depositors' rights and keep from using depositors' money to fuel real estate speculation. Banks should assess the borrowers' use of funds and enhance risk management and refrain from relying solely on collateral appraisal or borrowers' status as principals of large companies to grant a large credit line.

The CBC has also urged the banks with growing business volume in collateralized industrial land lending, to rigorously observe credit regulations in extending such loans. The CBC will also continue to carry out target examinations in this regard.

IV.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, in line with its statutory mandates, will step in to maintain an orderly market. The NT dollar has in recent years maintained its dynamic stability, which has been conducive to external trade growth.   

V.   The CBC has set aside from its foreign exchange reserves USD20 billion, EUR1 billion, and JPY80 billion as seed funds in the Taipei Foreign Currency Call-Loan Market since 1989. To meet demand for year-end funding amid tight foreign currency funding conditions and rising interest rates in the global financial markets, companies in need of foreign currency funds for working capital or overseas M&A deals may access the funds in the Taipei Foreign Currency Call-Loan Market through their partner banks.