Monetary Policy Decision of the Board Meeting

I.     Global economic and financial conditions

Since the beginning of the year, the global economy has posted slow growth. Moderation in advanced economies primarily resulted from weaker momentum of the US economy owing to subdued investment, mild expansion in the euro area and sluggish growth in Japan. On the other hand, emerging market economies have advanced at a steady pace. While gradual improvements were recorded for commodity-producing countries, China's economy continued to slow, and growth in ASEAN economies remained flat. As the effect of past declines in international energy prices faded and global commodity prices have rebounded from previous low levels since early this year, global inflation has been driven moderately upward.

A string of factors, including decelerating growth in world trade and investment, the effects of the Britain's exit from the European Union and China's economic rebalancing, as well as stronger expectations of a US Fed rate hike by the end of this year, could potentially heighten volatility in financial markets and dampen the global economic outlook. Recently, international institutions have widely revised down their growth projections for the world economy for 2016, yet next year's performance is expected to be better than this year.

II.    Domestic economic and financial conditions

1.    The domestic economy picked up in the second quarter with GDP growth returning to positive territory. The annual growth rates of exports in July and August also turned positive and export orders performed better. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecast the domestic economy to expand by 2.38% in the fourth quarter, and 1.22% for the entire year. Exports for 2017 are likely to see improvements as the global economy gradually gather steam. In addition, private consumption and private investment are expected to rise mildly. Therefore, the DGBAS projected Taiwan's economy to grow 1.88% in 2017.

In the labor market, as corporate profits declined amid a tepid domestic economy, wages have exhibited negative growth since the beginning of 2016, and the increase in employed persons narrowed. In recent months, the unemployment rate moderately climbed upward as a result of the graduation season. The unemployment rate registered 3.93% for the first eight months of 2016, a year-on-year increase of 0.20 percentage points.

2.    Falling food prices in the past few months led the CPI annual growth rate to drop to 0.57% in August. The DGBAS forecast the CPI annual growth rate to record 0.60% in the fourth quarter and 1.12% for the entire year. As the world economy exhibited a mild recovery, international raw material prices remained at relatively low levels, and there were no signs of strong domestic demand, inflation outlook for 2017 is expected to be mild.

3.    In the context of stable inflation, the CBC has maintained domestic financial conditions at an accommodative level in order to bolster economic growth. For the first eight months of 2016, banks' excess reserves recorded an average amount of NT$41.2 billion. The average annual growth rates of bank loans and investments and the monetary aggregate M2 were 4.22% and 4.75% for the same period, respectively. This indicates there is ample market liquidity to support economic activity.

The market interest rates have declined in reflection of four policy rate cuts and sluggish credit demand amid slow recovery at home and abroad. Compared with other major economies, the domestic short- and long-term nominal interest rates both stayed at relatively low levels.

III.    Interest rate decision

Against a backdrop of moderate global growth and renewed momentum for the domestic economy, along with a mild inflation outlook for next year, the Board judged that a policy rate hold is conducive to price and financial stability and an accommodative monetary policy stance helps to foster economic growth.

The Board reached the following decision unanimously at the Meeting today:

The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are kept unchanged at 1.375%, 1.75%, and 3.625%, respectively.

The CBC will continue to closely monitor both international and domestic economic and financial conditions and take actions as warranted to fulfill its statutory mandate.

IV.    Continued monetary easing by major advanced economies, as well as uncertainties over the Fed's rate hike and other factors, have induced massive, erratic cross-border capital movements and increased fluctuations in the NT dollar exchange rate. In principle, the NT dollar exchange rate is determined by market forces. Nevertheless, 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 duties, step in to maintain an orderly market.

V.    As the global economic growth has been running below its pre-crisis long-term average for a few years, a low-growth trap may manifest itself. Several international organizations have pointed out that, under this environment, monetary policy in most economies has almost exhausted its powers. They therefore advised that fiscal policy take a more central role and structural reforms be expedited. The key is to boost productivity via infrastructure investment, high in both quantity and quality. It is also crucial to make dedicated efforts in revitalizing world free trade in order to achieve inclusive growth so that economic prosperity can be shared by all.