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Central Bank of the Republic of China

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Monetary Policy Decision of the Board Meeting

Central Bank of the Republic of China (Taiwan)

PRESS RELEASE                        Release Date: June 22, 2017

Monetary Policy Decision of the Board Meeting

I.        Global economic and financial conditions

Since the beginning of the year, world trade has gradually picked up and the international economic recovery has gained a more solid footing. The near-term outlook points to moderate US economic expansion, a sustained eurozone recovery, and modest acceleration in Japan. Growth in emerging market economies is likely to gather pace, while the Chinese economy might experience a mild slowdown.

In the context of the economic uptick and subdued inflation, central banks in the euro area and Japan both maintained monetary easing policies. The US Fed, however, continued on the path toward gradual normalization, which could heighten financial market volatility. The global economic outlook also faces other causes for concern, including uncertainties associated with international economic and trade policies, the progress of Brexit negotiations, and geopolitical risks.

II.      Domestic economic and financial conditions

1.    As the domestic economic upswing bolstered labor market conditions, employment increased and the unemployment rate dropped further. With weaker momentum in exports and capital equipment imports during recent months, combined with limited growth in retail sales, Taiwan's economy is expected to moderate slightly in the second quarter. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts that, in the second half of the year, the economy will advance at 1.76%, slower than the first half year's 2.37% owing to a higher base effect. For the year as a whole, the economic growth projection is 2.05%.

2.    Since early 2017, NT dollar appreciation has helped ease the pressure on imported inflation and domestic food prices have exhibited a downtrend. The CPI annual growth rate averaged 0.60% for the first five months of the year. Core inflation (excluding vegetables, fruit, and energy items) grew at an average pace of 0.97%, indicating mild inflationary pressures at present.

Factors including the newly-increased cigarette tax are expected to drive the CPI higher in the second half of 2017 than the first half. Nevertheless, considering subdued global inflation expectations, falling oil prices, and soft domestic demand, the CBC forecasts CPI and core CPI inflation for 2017 to rise 1.07% and 1.11% year on year, respectively, reflecting a stable inflation outlook.

3.    Against the backdrop of the domestic economic recovery and stable inflation, the CBC has continued to conduct open market operations to manage market liquidity and maintain banks' excess reserves at a sufficiently accommodative level. Bank credit expanded steadily, with its year-on-year growth averaging 4.65% for the first five months of the year. Growth of the monetary aggregate M2 stayed within the target range. The M2 annual growth rate for the first five months of the year was 3.72%. All these reflect ample market liquidity in support of economic activity.

In the year to date, liquidity in the banking system has been abundant, overnight call loan rates have remained steady, and the 10-year government bond yield has moved within a narrow range. Meanwhile, net foreign capital inflows have led to NT dollar appreciation and a domestic stock market rally.

III.    Interest rate decision

Current domestic inflationary pressures and inflation expectations are both mild. Meanwhile, domestic real interest rate relative to GDP growth is still at an appropriate level among major economies (see Appendices 1 and 2). However, uncertainties remain in the global economy, and growth momentum in the domestic economy may slightly weaken in the second half of the year. Taking into account the above factors and the expansionary fiscal policies implemented by the government, the Board judged that a policy rate hold and an accommodative monetary policy stance are conducive to price and financial stability and help 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 inflation developments as well as international and domestic economic and financial conditions. We will undertake appropriate monetary policy actions in line with the central bank’s statutory mandate.

IV.   In recent years, international capital flows have become the dominant factor behind exchange rate movements. In the first half of this year, substantial foreign capital inflows have brought about an upsurge in foreign currency supply, resulting in NT dollar appreciation against the US dollar.  

In principle, the NT dollar exchange rate is determined by market forces. If 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 mandate, step in to maintain an orderly market so as to ensure economic and financial stability.

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