Monetary Policy Decision of the Board Meeting

I.    Global economic and financial conditions

Recently, growth momentum in major advanced economies has picked up slightly. Among them, the US economic recovery has strengthened, while the euro area has grown at a steady pace, yet growth in Japan remains slow. Meanwhile, emerging market economies continue on a stable course of growth, with China's economy advancing steadily.

Looking ahead to 2017, as major economies implemented fiscal stimulus to support growth and emerging market economies benefit from the upturn in international raw material prices, the global economy is anticipated to show a better performance than this year. Nevertheless, a number of issues such as the US Fed policy rate path and the new administration's policy direction, rising trade protectionism, the impact of Brexit, and China's rebalancing, will all add to uncertainties over the global economy.

II.    Domestic economic and financial conditions

1.    Exports have resumed growth in recent months, while expansion in industrial production continued. Private consumption and investment exhibited mild growth. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecast the domestic economy to expand by 2.37% in the fourth quarter from 2.03% in the previous quarter and 1.35% for the entire year. Bolstered by the pick-up in the domestic economy the unemployment rate has slightly declined in the past few months and the labor market conditions have gradually improved.

For the year of 2017, the world economy is expected to moderately recover and global trade growth is likely to rebound, both of which will benefit exports. In addition, the increase in public investment by the government could help boost private investment. However, in light of limited wage growth and slackening private consumption the DGBAS projected Taiwan's economy to grow 1.87% in 2017.

2.    Driven by higher prices of vegetables and fruit the CPI annual growth rate averaged 1.84% for the months of October and November. Excluding vegetables, fruit, and energy items, core inflation rose at 0.90%. The DGBAS forecast a 1.31% CPI growth rate for the entire year.

The oil-producing countries recently reached an agreement on a production cut leading oil prices to move upward. Nonetheless, global inflationary pressures are expected to be restrained by moderate growth in the world economy next year, while domestic demand remains sluggish. Therefore, Taiwan's major forecasting institutions projected the annual growth rate of CPI to be 1.1% for 2017.

3.    In the context of gradual recovery in the domestic economy, the CBC has maintained an accommodative monetary policy stance in order to foster economic growth. Through open market operations banks' excess reserves recorded an average amount of NT$43 billion for the first eleven months of 2016. The average annual growth rates of bank loans and investments and the monetary aggregate M2 were 4.15% and 4.54% for the same period, respectively. This indicates there is ample market liquidity to support economic activity.

Following four policy rate cuts, market interest rates have also dropped. Yet, affected by the rise in the US bond yields, yields on Taiwan's government bonds have gradually trended up since mid-November. Compared with other major economies, domestic short- and long-term interest rates still stayed at relatively low levels, which help reduce financing costs for enterprises.

III.    Interest rate decision

Although international institutions widely projected the world economy's performance for next year will be better than this year, the outlook for the global economy is still clouded by many uncertainties. Against a backdrop of moderate momentum for the domestic economic recovery next year, a lingering negative output gap, mild inflation, and stable expectations of future inflation, the Board judged that holding policy rates unchanged 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 conditions and take actions as warranted to fulfill its statutory mandate.

1.    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.

2.    In view of the economic growth and price trends, the Board decided to set the 2017 M2 growth target range at 2.5% to 6.5% (see Appendix), the same as this year.

 

IV.    The NT dollar exchange rate is in principle determined by market forces. Nevertheless, monetary policy divergence among major central banks has induced erratic cross-border capital movements which could potentially heighten volatility in global financial markets. If the abovementioned factor leads 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 mandate, step in to maintain an orderly market.