Monetary Policy Decision of the Board Meeting

I.      Global economic and financial conditions

Recently, the world economy has performed weaker than expected. While the US economy expanded at a moderate pace, the economic recovery in the euro area and Japan remained slow. Growth in China, as well as other emerging market economies, decelerated considerably. As a consequence, international forecasting institutions continued to revise down their growth projections for the world economy for this year and 2016.

The global economy is expected to grow slightly faster next year than this year. Nevertheless, the US Fed initiated a rate hike while other major economies continued with monetary easing. The policy divergence among major central banks may intensify financial market volatility. Moreover, the possibility of an ongoing downtrend in international oil prices and rising geopolitical risks, coupled with cyclical and structural factors, also add to uncertainties. Downside risks to the world economy remain.

II.     Domestic economic and financial conditions

1.    Exports continued to weaken recently. The manufacturing purchasing managers' index (PMI) has been lower than 50% for five consecutive months, indicating a contraction in manufacturing activity. The private sector has been more cautious on investment, private consumption posted limited growth, and public investment decreased. Given weak growth momentum for domestic and external demands, the Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts the domestic economy to only expand modestly by 0.49% in the fourth quarter, and 1.06% for the entire year.

In the labor market, the unemployment rate rose slightly to 3.90% in October and wage growth moderated, both reflecting that slowdown in economic activity has come to affect employment conditions and may restrain private consumption growth.

With the global value chains expanding at a slower rate, a moderate recovery expected for the global economy next year will not be able to drive trade growth sufficiently. This will put strains on any significant improvement in external demand and consequently slow private investment growth as well as consumer spending. The DGBAS projects Taiwan's economy to grow 2.32% in 2016. However, the widening negative output gap and slackening aggregate demand suggest more efforts are needed to reinforce economic growth momentum (see Appendix 1).

2.    The CPI annual growth rate has returned to positive territory since September, registering 0.53% in November and averaging -0.35% for the first eleven months of the year. The DGBAS forecasts a -0.31% CPI growth rate for the entire year as domestic inflation is projected to be subdued.

While low international commodity prices including oil have dragged down inflation expectations, energy price slumps will likely weigh less on the inflation downtrend next year. The CPI annual growth rate is expected to rise mildly toward 0.84% in 2016.

3.    Taking recent economic developments into consideration, the CBC has continued to conduct open market operations to maintain banks' excess reserves at an accommodative level. The annual growth rates for the first eleven months of the year were 4.67% for bank loans and investments and 6.40% for the monetary aggregate M2. Both readings were higher than the economic growth rate, indicating ample market liquidity.

III.    Monetary policy decision at the Board Meeting today

Since the September Board meeting, where a rate cut was decided, the pace of global economic recovery has fallen short of expectations, and domestic growth forecast has been revised down. Meanwhile, the negative output gap has widened and inflation expectations are mild. Against this backdrop, the Board judged that cutting the policy rates and maintaining the M2 growth target range at 2.5%-6.5% to keep monetary conditions accommodative will help foster economic growth.

The CBC will continue to closely monitor both international and domestic economic and financial developments, and undertake appropriate monetary policy actions so as to sustain price and financial stability.

1.   The Board reached a unanimous decision on policy rates:

The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are cut by 12.5 basis points each to 1.625%, 2%, and 3.875%, respectively, effective from December 18, 2015.

2.    In view of the economic growth and price trends, the Board decided to set the 2016 M2 growth target range at 2.5% to 6.5% (see Appendix 2).

IV.    The NT dollar exchange rate is in principle determined by market forces. Nevertheless, uncertainties associated with macroeconomic policies of various countries tend to disrupt global financial markets and, in turn, heighten volatility in the NT dollar exchange rate with adverse implications for economic and financial stability. In line with its statutory mandates, the CBC will step in to maintain an orderly market when needed.

V.     Weaker growth momentum for Taiwan's economy in the past few years can be partly explained by short-term cyclical factors, but longer-term structural constraints also play a significant role. Therefore, it is recommended that an optimal mix of countercyclical policies be adopted and appropriate structural reforms be implemented, so as to boost productivity, create jobs and bolster growth momentum.