Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: June 26, 2014
Monetary Policy Decisions of the Board Meeting
I.At the meeting today, the Board reached the following decisions unanimously:
1.The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral will remain at 1.875%, 2.25%, and 4.125%, respectively.
2.The Board has made a number of amendments to the Regulations Governing Home Mortgage Loans and Land Loans Extended by Financial Institutions, effective from June 27, 2014 (See Appendix 1):
(1)Expanding the scope of Specific Areas to include four more districts in New Taipei City, namely Wugu, Taishan, Bali and Yingge, and four districts in Taoyuan County, namely Taoyuan City, Luzhu, Zhongli and Guishan.
(2)Introducing a loan-to-value (LTV) ratio cap of 50% on a new housing loan taken out by a single borrower for his/her third (or more) home purchase, applicable to properties across the country.
(3)Revising the definition of high-priced housing, of which the LTV ratio ceiling will be lowered to 50%.
(4)Lowering the LTV ratio ceiling on housing loans taken out by corporate legal entities to 50%.
II.The interest rate decisions are based on the following:
1.In recent months, consumption demand in Japan experienced a decline, and growth in emerging market economies continued to slow down. In contrast, economic activity has rebounded in the US, while the ECB's recent announcement of further monetary easing strengthened the growth momentum in the eurozone; both developments support global economic recovery. As a result, international forecast agencies predict the global economy to deliver a better performance in the second half of 2014 than the first.
2.Meanwhile, driven by the mild global economic recovery, Taiwan's exports grew at a steady pace. In addition, lively activity in Taiwan's stock markets and a continued pickup in consumer confidence boosted the private sector's willingness to spend. Private investment also saw an increase. The Taiwanese economy has shown steady growth in the second quarter. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts the domestic economy to post a higher growth rate in the second half of the year than the first, and to expand by 2.98% for the entire year (See Appendix 2).
In terms of labor market conditions, employment continued to rise as companies increased hiring amid an upturn in the domestic economy. The unemployment rate fell to 3.85% in May 2014, the lowest since June 2008.
3.For the first five months of the year, the CPI annual growth rate averaged 1.14%. This was mainly due to adverse supply-side factors such as infected piglets and unfavorable weather conditions leading food prices to increase by 3.68%.
The high level of food prices, coupled with a spike in international oil prices resulting from the geopolitical tension in the Middle East, pushed up inflation expectations. However, international grains prices declined and the domestic output gap remained negative. As a result, the DGBAS projects an inflation rate of 1.88% for the second half of 2014 and 1.53% for the year as a whole (See Appendix 2).
4.Taking into account inflation and prevailing economic conditions, the CBC has continued to manage market liquidity through open market operations to maintain excess reserves at an appropriate level. The overnight interbank call loan rates remained broadly stable, and the growth of the monetary aggregate M2 stayed within the target range. The annual growth rate of M2 for the first five months of the year was 5.92%.
In summary, the inflation outlook is stable and actual output remains lower than potential output. However, the monetary policy stances in the US and Europe may have an impact on the international financial markets. Combined with the geopolitical risks, uncertainties in the global economy linger. Consequently, the Board judges that a rate hold is conducive to maintaining price and financial stability as well as economic growth. Looking ahead, 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. Price and financial stability are two of the CBC's mandates. While monetary policy instruments such as interest rates are utilized to attain price stability, targeted macro-prudential measures can be more effective in safeguarding financial stability (when, for example, managing real estate credit risk).
Since June 2010, the CBC has introduced several rounds of targeted macro-prudential measures concerning housing loans in the stipulated Specific Areas, and high-priced housing loans and land loans nationwide. Furthermore, in view of a more pronounced price increase in districts outside Specific Areas, the CBC has, since March 2013, urged banks to exercise self-discipline to enhance risk management of housing loans in these districts.
1.Nevertheless, the CBC's financial examinations and data analysis indicate some variance in the self-restraint measures taken by banks, along with the following findings:
(1)Mortgage concentration and housing market overvaluation have spread from Specific Areas to neighboring districts.
(2)There is a disproportionally large share of ''single borrowers with multiple mortgages'' in banks' loan portfolios, suggesting some buyers are using bank credit to finance property hoarding for investment purposes.
2.Furthermore, in terms of high-priced housing, of which prices are more volatile and risks higher, the CBC recognizes the need to make the necessary changes to the valuation range of and the LTV limit on high-priced housing.
Therefore, the Board decided to amend the aforementioned Regulations with the aim of further strengthening banks' management of risks associated with mortgage lending under a set of consistent rules.
IV.Macro-prudential measures introduced by the CBC to rein in housing credit, such as LTV ratio caps, still have constraints because only 28.5% residential properties in the country are purchased with loans. Sound development of the housing market therefore must rely on further concerted policy efforts by relevant authorities on demand, supply, and institutional arrangements.
V.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.