Monetary Policy Decision of the Board Meeting
PRESS RELEASE Release Date: March 22, 2018
Monetary Policy Decision of the Board Meeting
I. Global economic and financial conditions
Since the Board met in late December last year, advanced and emerging market economies have posted solid expansion, which may lead global economic growth to strengthen further in 2018. Among major economies, growth in the US economy is expected to accelerate, the euro area continues to exhibit robust growth, while Japan and China are likely to expand at a slower pace. Amid the continued global economic pickup, raw material prices may register an uptrend, and therefore inflation in major economies is expected to move up gradually.
Looking ahead, the progress of monetary policy normalization implemented by central banks in major economies, US economic and trade policies, which could cause trade protectionism to spread on a global scale, and heightened volatility of financial asset prices may have an impact on global financial stability and economic outlook.
II. Domestic economic and financial conditions
1. For the year to date, exports have risen moderately, while capital equipment imports have recorded a smaller decrease. Consumer confidence has been robust, and the domestic economy has continued to grow. Labor market conditions were stable, with employment steadily increasing and the unemployment rate declining further.
Growth momentum in exports may slightly weaken this year owing to the base effect. Nevertheless, the Forward-Looking Infrastructure Development Program rolled out by the government may shore up private investment, while mild wage increases are likely to boost private consumption, which will combine to bolster domestic demand as a major driving force for economic growth. The CBC forecasts Taiwan's economy to advance at an annual rate of 2.58%, slightly slower than the 2.86% of the year before.
2. For the first two months of the year, the average annual CPI growth rate was 1.54%, mainly driven by higher vegetable and cigarette prices. Core inflation (excluding vegetables, fruit, and energy items) recorded an average annual growth rate of 1.61%, indicating a moderate price uptrend.
As imported raw material prices such as crude oil are expected to rise this year and the hikes in minimum wage and public sector employee pay may spur wage increases for workers in the private sector, domestic prices are likely to go up. However, with the output gap remaining negative, demand-pull inflationary pressures are subdued, and the inflation outlook is stable. The CBC projects CPI and core CPI to grow at a pace of 1.27% and 1.26% year on year in 2018 (see Appendix 1).
3. Against a backdrop of continued economic growth and stable inflation, the CBC has continued to manage market liquidity through open market operations and bank reserves have stood at an appropriate level. For the first two months of the year, bank loans and investments and the monetary aggregate M2 posted average annual growth rates of 4.45% and 3.60%, respectively, deemed sufficient to support economic activity.
In recent months, market liquidity has remained ample and market interest rates have held steady. The NT dollar has strengthened against the US dollar, but the real effective exchange rate (REER) index of the NT dollar trended down as major currencies appreciated more markedly against the US dollar. Overall, the financial condition index has generally reflected easy financial conditions.
III. Monetary policy decision
In sum, both current inflationary pressures and future inflation expectations are mild, and Taiwan's real interest rate stands at an appropriate level among major economies (see Appendix 2). In addition, global economic outlook still faces uncertainties, while the domestic growth momentum could soften modestly from the previous year and the actual output remains below potential. Based on the above assessment, the Board judged that a policy rate hold will help safeguard price and financial stability and 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 watch the latest developments in domestic economic and financial conditions including actual and expected inflation and the output gap. We will closely monitor the progress of policy normalization by major central banks, monetary policy changes in emerging market economies, and risks likely induced by heightened financial market turmoil around the world. The CBC will timely undertake appropriate monetary policy actions as warranted by these developments in order to fulfill the central bank's statutory mandate.
IV. The CBC has adopted consistent exchange rate policy aimed at dynamic stability. 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 step in to maintain an orderly market.