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Central Bank of the Republic of China


Monetary Policy Decision of the Board Meeting

Central Bank of the Republic of China (Taiwan)

PRESS RELEASE                  Release Date: September 27, 2018

Monetary Policy Decision of the Board Meeting

I.        Global economic and financial conditions

Since the Board last met in late June this year, the global economy has witnessed continuous growth. Nevertheless, signs of escalation in trade friction between the US and China and further gradual normalization of the US monetary policy, combined with currency depreciation and deteriorating economic and financial conditions in several emerging market economies such as Turkey, have heightened volatility in global financial markets and affected the global economic outlook.

International institutions widely expect the global economy to have a weaker performance in the second half of the year than the first half and major economies to post slower growth in 2019. Nevertheless, currency devaluation in many economies induced by a strengthening US dollar and energy price rises have pushed up global inflation expectations.

II.      Domestic economic and financial conditions

1.    Since mid-2018, affected by global economic uncertainties such as US-China trade conflicts and a higher comparison base, export growth has slowed slightly. On the other hand, domestic demand has remained the key driving force of economic growth. Of the components, stable employment and higher wages have contributed to moderate growth in private consumption. Capital equipment imports have expanded, private investment has picked up, and public investment has also continued to rise. The CBC forecasts Taiwan's economy to grow by 2.30% for the second half of the year and 2.73% for the entire year.

Looking ahead to 2019, the government will increase public investment, while private consumption is likely to grow at a steady pace. However, deceleration in global economic and trade growth may lead exports and private investment to register slightly weaker growth next year than this year. As a result, the CBC projects the domestic economy to advance by 2.48% in 2019. Domestic demand will continue to serve as the primary driver of economic growth.

2.    For the first eight months of the year, the average CPI annual growth rate was 1.64%, while core inflation (excluding vegetables, fruit, and energy items) averaged 1.44%, reflecting a mild price uptrend. Crop damage caused by recent torrential rain and elevated oil prices have driven short-term prices upwards, yet inflation is likely to moderate as the effect of the cigarette tax hike is expected to significantly fade away in the fourth quarter. The CBC projects the annual growth rates of CPI and core CPI for 2018 to be 1.50% and 1.28%, respectively.

In terms of next year, as global oil prices are forecast by international institutions to rise less sharply than this year, along with moderate domestic demand and the dissipation of effects from mid-2017's cigarette tax hike, CPI and core CPI are projected by the CBC to increase by 1.05% and 1.00% year on year in 2019, both slower than 2018. The outlook for inflation is mild (Table 1 in Appendix).

3.    In line with continued domestic economic growth and mild inflation, the CBC has managed market liquidity with flexibility, and banks' reserves have remained at an appropriate level. For the first eight months of the year, the annual growth rate of bank loans and investments averaged 5.23%, representing steady growth. In the meantime, the monetary aggregate M2 expanded at an annual pace of 3.66%, within the target range. Overall, financial conditions remained accommodative with ample market liquidity and stable short- and long-term market rates.

III.    Interest rate decision

Domestic inflationary pressures are mild, and the output gap, though expected to narrow further this and next year, remains negative, indicating a stable inflation outlook. Moreover, as the many uncertainties over the global economic outlook could restrain the strength of the economic pickup from the second half of this year into next year, the growth momentum for Taiwan's economy is still moderate. Meanwhile, Taiwan's nominal and real interest rates register around the middle range among a host of economies (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 foster price and financial stability and sustain 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 monitoring domestic economic and financial conditions and pay close attention to any possible impacts on Taiwan's economic and trade activities and financial market stability resulting from global trade disputes, monetary policy normalization in major economies (except for the US Fed on track for more rate hikes, central banks in the euro area, Japan, and China maintain an accommodative stance), and financial risks facing emerging market economies. We will undertake appropriate and timely monetary policy actions as warranted to fulfill the central bank's statutory mandate.

IV.   To ensure financial stability, the CBC has kept a watchful eye on financial institutions' management of risks associated with real estate lending. In addition, since the mortgage debt-to-income ratio (monthly mortgage repayment as a percentage of monthly disposable income) of the household sector has exceeded 30%, borrowers are advised to be mindful of increased debt-servicing burdens after the expiration of grace periods and risks stemming from future interest rate changes. 

V.  Since the previous Board Meeting, exchange rate volatility has intensified for most emerging market economies. The NT dollar has also seen sharper swings in its exchange rate vis-à-vis the US dollar, but not as volatile as 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 accordance with its mandate, step in to maintain an orderly foreign exchange market.

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