Monetary Policy Decision of the Board Meeting

I.    Global economic and financial conditions

Since the Board met in late June this year, advanced economies and emerging market economies have both been recovering at a steady pace. International institutions have revised up global GDP growth forecasts for 2017 and expect the global economy to perform better next year than this year.

However, the US Fed is about to initiate the balance sheet normalization program, while the ECB may also review its asset purchase scheme. In addition, the US economic and trade policies, the rise in trade protectionism, and geopolitical tension will all add to the risk to the global economic and financial outlook.

II.    Domestic economic and financial conditions

1.  Since mid-2017, solid global economic growth has driven up exports. With regard to domestic demand, private consumption recorded limited growth, while declining capital equipment imports reflected the fact that firms were cautious about investment. The CBC forecasts that, in the second half of the year, Taiwan's economy will expand at an annual rate of 1.93%, slower than the first half year's 2.39%. For the year as a whole, the economic growth projection is 2.15%.

Export growth is likely to benefit from a firming global economy next year. Meanwhile, the government rolled out the ''Forward-Looking Infrastructure Development Program'' to help bolster domestic demand with infrastructure spending. As a result, the CBC forecasts the domestic economy to advance by 2.20% for 2018. Recently-announced pay rise for public sector employees next year may also encourage private enterprises to follow suit, contributing to higher private consumption. This may help the domestic economy to register stronger growth than projected.

Labor market conditions improved further and employment increased continuously, with the services sector accounting for a larger increase than others. For the first seven months of the year, the unemployment rate averaged 3.76%, decreasing by 0.15 percentage points compared to the same period last year.

2.  From June onwards, on account of the rebound in domestic food prices, the CPI annual growth rate displayed a mild uptrend and reached 0.96% in August. For the first eight months of the year, the CPI annual growth rate averaged 0.72%. Core inflation (excluding vegetables, fruit, and energy items) recorded an average annual growth rate of 0.97%, indicating mild price rises. The CBC forecasts CPI and core inflation for 2017 to rise 0.80% and 1.04% year on year, respectively.

Looking ahead to 2018, in the context of stabilizing international oil prices, subdued global inflation expectations, moderate domestic demand, and the output gap remaining negative, the CBC projects the annual growth rates of CPI and core CPI for 2018 to be 1.12% and 1.13%, respectively, reflecting a stable inflation outlook.

3.  The CBC has continued to conduct open market operations to manage market liquidity. In the months from June to August, banks' excess reserves remained well sufficient. For the first eight months of the year, M2 and bank loans and investments posted average annual growth rates of 3.71% and 4.68%, respectively. This suggests that domestic financial conditions have been adequately accommodative and there is ample market liquidity to support expansions in corporate and household spending.    

Since the Board last convened, the NT dollar has strengthened slightly against the US dollar, the interbank overnight call loan rates have held steady, and government bond yields have trended down. While many countries registered negative real interest rates, Taiwan has seen its real interest rate return to positive territory (see Appendices 1 and 2).

III.    Interest rate decision

In sum, uncertainties over the global economic outlook still weigh on external demand; domestic demand is mild, and economic growth, though projected to pick up at a moderate pace in the second half of this year and next year, would still run below potential. Meanwhile, the real interest rate has risen above zero, and both current inflation and inflation expectations stay anchored. Against this backdrop, the Board judged that a policy rate hold is conducive to financial stability and economic recovery.

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 the latest developments in both actual and expected inflation, output gap, and other international and domestic economic and financial conditions. We will undertake appropriate monetary policy actions accordingly in an attempt to fulfill the central bank’s statutory mandate.

IV.    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.