Monetary Policy Decision of the Board Meeting

I. Global economic and financial conditions:
Since the beginning of the year, economic activity in the US has experienced moderate growth and some improvements have been seen in the euro area, whereas Japan's economy has remained lackluster and growth in emerging economies such as China has continued to slow. Global Insight forecast the world economy to expand by 2.9% in 2015, slightly higher than the 2.7% in the previous year. Nevertheless, market expectations of a possible rate hike by the Fed, a strengthening US dollar, expanded monetary easing measures in the euro area and Japan, and increasing volatility in international oil prices and financial asset prices affected the stability of financial markets. As a consequence, uncertainties in the global economy still linger.
II. Domestic economic and financial conditions:
1. Taiwan's exports grew at a slightly slower pace amid modest growth of the global economy. However, the plunge in energy prices helped bolster consumer confidence. This will provide a boost to private consumption and private investment is also likely to pick up. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts Taiwan's economy to expand by 3.50% for the first quarter and by 3.78% for the entire year as growth is expected to advance further in the coming quarters.
Labor market conditions continued to improve on the back of a recovering economy and employment increased steadily. The unemployment rate dropped to 3.69% in February, the lowest since February 2001. As the government encouraged a wage hike and corporate profits also rose, enterprises began to take action to raise wages. For the year of 2014, average monthly earnings of the industrial and service sectors grew by 3.58%, the biggest increase in four years.
2. Dampened by significant declines in international commodity prices including oil, the CPI annual growth rate has trended downward since September 2014 and fell to -0.56% for the first two months of the year. The DGBAS forecasts inflation to reach -0.33% for the first quarter. However, inflation is expected to pick up quarter by quarter and to average 0.26% for the entire year. Major forecast agencies mostly projects domestic inflation to be under 1% for 2015.
Core inflation (excluding prices of fruits, vegetables, and energy) for the first two months of the year advanced at an average pace of 1.21%, with a mild increase projected for the year as a whole.
The weakening in prices of oil-related goods and services, reflecting international oil price declines, has driven down inflation expectations. Nonetheless, as the downward trend of oil prices began in mid-year of 2014 and contributed to a lower base, it is expected that the effect of an oil price slump on domestic prices will gradually abate.
3. The CBC has continued to conduct open market operations to manage market liquidity and maintain banks' net excess reserves at an appropriate level. The overnight interbank call loan rates remained broadly stable, and bank credit expanded steadily, with its year-on-year growth averaging 4.91% for the first two months of the year. Growth of the monetary aggregate M2 stayed within the target range. The M2 annual growth rate for the first two months of the year was 6.19%, sufficiently supportive of economic activity.
III. At the meeting today, the Board reached a unanimous decision:
In sum, uncertainties continue to surround the global economic recovery, while domestic economy improves steadily, and inflation is low and stable with a temporary softening in inflation expectations. Against this backdrop, the Board judged that a policy rate hold will help maintain price and financial stability and foster economic growth, and decided to:
keep 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.
IV. To sustain financial stability, the CBC has introduced a series of targeted macroprudential measures since June 2010 to rein in banks' real estate-related risks. Positive results from these measures, combined with government policy efforts towards a reasonable property tax levy, have successfully helped restrain activity in the housing market and expectations for rising housing prices.
V. As monetary easing in the US, Japan, and the euro area created spillover effects, massive and volatile cross-border capital flows became a destabilizing force to Taiwan's foreign exchange and financial markets. If 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, in line with its legal mandates, step in to maintain an orderly market.
VI. The CBC will continue to closely monitor both international and domestic economic and financial developments related to realized and expected inflation as well as output gap. We will undertake appropriate monetary policy actions with flexibility so as to fulfill the statutory objectives of central bank operations.