Monetary Policy Decision of the Board Meeting

I.        Global economic and financial conditions

Since the Board met in late March this year, the global economy has experienced a robust expansion. Among major economies, growth in the US economy has accelerated, whereas the euro area, Japan and China have shown signs of slight moderation. An uptrend in commodity prices including oil prices has led global inflation to rise. Meanwhile, markets expected a faster pace of the US Fed's rate hikes, and trade conflicts between the US and China raised concern. These developments have induced capital outflows and declines in stock prices and currency values in some emerging market economies, heightening the volatility in global financial markets.

The Fed announced another rate increase last week, yet its policy stance remains accommodative. The ECB decided to phase out its asset purchase program by the end of the year and maintain policy rates at present levels at least until the summer of 2019. Moreover, central banks in Japan and China both kept their policy rates unchanged. This indicates that major economies still held an accommodative monetary policy stance.

Looking ahead, the continuation of the path toward monetary policy normalization by major central banks may have a further impact on debt-laden emerging market economies and could raise global financial fragilities. This, combined with escalating trade frictions among major economies, will all increase the uncertainties over the global economic and financial outlook.

II.      Domestic economic and financial conditions

1.    For the year to date, exports have posted solid growth and private consumption has picked up. The domestic economy advanced at a steady pace. As for the second half of the year, it is expected that export growth momentum may soften because of a higher base effect, whereas domestic demand will continue to serve as the primary driver of economic growth.

With regard to private consumption, the upcoming enforcement of the public sector pension reform may slightly affect consumers' willingness to spend. Nevertheless, bolstered by a gradual improvement in labor market conditions, such as increased employment, declining unemployment rate, and mild wage growth, private consumption is likely to grow steadily. In addition, private investment growth may rebound on account of an anticipated rise in capital expenditure by domestic manufacturers and a lower base effect. As a result, the CBC forecasts Taiwan's economy to advance by 2.30% for the second half of the year.

For the year as a whole, the CBC has revised up the economic growth projection to 2.68%, reflecting a better-than-expected performance in the domestic economy in the first quarter and the CBC's upward revisions in export and private investment growth.

2.    The increase in international oil prices was larger than expected, pushing up domestic import prices. Furthermore, rising vegetable prices and the hike in cigarette prices also contributed to a greater increase in CPI inflation in recent months. For the first five months of the year, the average CPI annual growth rate was 1.66%, while core inflation (excluding vegetables, fruit, and energy items) averaged 1.40%, suggesting that current inflationary pressures remain mild.

In terms of the inflation outlook in the second half of 2018, the annual growth rate of CPI is expected to moderate to 1.21% as telecommunication rates were pared down and the deferred effect from last year's cigarette tax hike fades away. The CBC, taking into account of international oil price increases, has revised up its forecast of CPI inflation to 1.40% and revised its core CPI forecast downwards to 1.16% in view of reductions in telecommunication rates (see Table 1 in Appendix for major institution projections).

3.    The CBC has managed market liquidity through open market operations in response to domestic economic conditions. Banks' reserves have remained at an appropriate level. In recent months, an uptick in short-term market rates was accompanied by small declines in the 10-year government bond yield, and the NT dollar weakened against the US dollar, pointing to continued easy financial conditions.

For the first five months of the year, bank credit registered steady growth, expanding by 4.93% year on year, while the monetary aggregate M2 posted an average annual growth rate of 3.62%, within this year's target range.       

III.    Interest rate decision

In sum, the inflation outlook for the year of 2018 is mild, along with gentle rises in domestic prices. As uncertainties over the global economy linger on the horizon, domestic economic growth is expected to slow slightly in the latter half of the year. For the year as a whole, the output gap is likely to close further but remain negative, with moderate momentum for economic expansion. It is also noted that the world’s major economies have continued with an accommodative monetary policy stance. Meanwhile, Taiwan's nominal and real interest rates register around the middle range among a host of economies (see Figure 1 and Table 2 in Appendix). Based on the above assessments, the Board judged that a policy rate hold and a continued accommodative monetary policy stance will help ensure price stability and foster steady economic and financial development.

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 monitoring the latest domestic economic and financial conditions and stay vigilant on the developments in monetary policy in other economies and global trade protectionism and their implications for Taiwan's economic prospects and financial market stability. We will timely undertake appropriate monetary policy actions as warranted in order to fulfill the central bank's statutory mandate.

IV.  Against a backdrop of amplified volatility in global financial markets recently, the NT dollar exchange rate vis-à-vis the US dollar has experienced greater fluctuations, albeit to a less extent compared to other major currencies.

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.