Monetary Policy Decision of the Board Meeting

I.         Global economic and financial conditions

Since the Board met in late September this year, dragged by an intensification of US-China trade conflicts and tightening global financial conditions, the global economy has expanded at a slower pace, trade growth momentum has weakened, and international financial markets have also experienced a high level of volatility. International institutions have thus widely revised down projections for global economic and trade growth this year and next year.

The global economy and major economies are expected to register slower growth in 2019. In addition, uncertainties such as global trade tensions, monetary policy directions of major economies, economic and financial fragilities in emerging market economies, as well as the developments regarding European political and economic conditions constitute downside risks that could potentially affect the global economic outlook.

II.      Domestic economic and financial conditions

1.    A slowing global economy and lingering trade disputes between the US and China have caused growth in exports and capital equipment imports to decelerate in recent months. Meanwhile, despite stable labor market conditions, a declining unemployment rate, and moderate wage growth, the domestic stock market correction triggered by international financial market turbulence have weighed on consumer sentiment. The CBC forecasts Taiwan's economic growth to decelerate further in the fourth quarter. For the entire year, the GDP growth rate is projected to be 2.68%. 

Looking ahead to 2019, growth in private consumption is likely to remain steady and private investment may also post continuous expansion while the government pushes ahead with the Forward-Looking Infrastructure Development Program. However, external demand may be dented by economic slowdowns experienced by Taiwan's major trading partners. Therefore, the CBC forecasts the domestic economy to advance by 2.33% for 2019.

2.    Since October this year, the rise in CPI has slowed as global oil prices turned sharply downwards, domestic vegetable prices fell because of abundant supply, and the effect of mid-2017's cigarette tax hike receded. The CBC projects the annual growth rates of CPI and core CPI (excluding vegetables, fruit, and energy items) for 2018 to be 1.38% and 1.21%, respectively.

In terms of next year, as global oil prices are forecast by international institutions to be somewhat lower than this year, leading to alleviated imported inflationary pressures, added with moderate domestic demand and the dissipation of the cigarette tax hike effect, CPI and core CPI inflation are projected by the CBC to decrease to 1.05% and 0.93% year on year in 2019 (see Appendix Table). The outlook for inflation is mild.

3.    The CBC has managed market liquidity with flexibility in view of the developments in domestic economic conditions, and banks' reserves have remained at an appropriate level. For the first eleven months of the year, the average annual growth rates of the monetary aggregate M2 and of bank loans and investments were 3.56% and 5.24%, respectively, indicating market liquidity is sufficient to support economic activity.

Recently, both short- and long-term interest rates rose slightly, lifted mainly by a greater demand for funds commonly seen at year ends. Despite heightened volatility across global financial markets and frequent cross-border capital flows, domestic markets still enjoyed ample liquidity and market interest rates remained relatively stable.

III.    Monetary policy decisions

In sum, international and domestic economic and financial developments informed the following assessment for next year, including a narrower expansion in the global economy, amplified uncertainties over the international economic and financial prospects, a moderation in domestic economic growth, a slightly wider negative output gap, and a mild inflation outlook that is softer than this year. Moreover, Taiwan's nominal and real interest rates register around the middle range among a host of economies. Therefore, the Board judged that a policy rate hold and a continued accommodative monetary policy stance will help foster sound development of the economy and the financial sector.

The Board reached the following decisions unanimously at the Meeting today:

1.    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.

2.    Taking economic growth, financial conditions, and price trends into consideration, the Board decided to set the 2019 M2 growth target range at 2.5% to 6.5%, same as this year (see Appendix Note).

IV.   The CBC will watch closely for any possible impacts on Taiwan's economic and financial conditions resulting from global trade protectionism, monetary policy shifts of major economies, global financial market volatility, and geopolitical risks. We will undertake appropriate and timely monetary policy actions as warranted, so as to fulfill the central bank's statutory mandate.

V.    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) as well as seasonal ones 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.

Appendix Note

Considerations for the year 2019 M2 growth target range

1.      In recent months, the Bank's financial conditions index[1] started to signal a tighter financial situation. In terms of the outlook, the economy is likely to grow at a slower pace in 2019 than in 2018, and inflation is expected to be more subdued but still stable. Meanwhile, continuing divergence in monetary policy among major economies is expected to induce more volatile capital movements across borders. In addition, domestic private investment and consumer confidence could be dampened by a more tempered view of global economic growth given the adverse implications of US-China trade conflicts, which would in turn weaken domestic growth momentum.

2.      Against such a backdrop of elevated political, economic, and financial uncertainties on the global scene, the M2 growth target range for 2019 is set at 2.5% to 6.5%, unchanged from this year. The CBC maintains an accommodative monetary policy stance as warranted, so as to sufficiently meet the funding needs of the private sector and foster economic growth.

3.      Given the uncertain outlook for international and domestic economic and financial conditions next year, the CBC will, as usual, review and assess the M2 growth target in mid-year and adjust the target range if necessary.

Appendix Table

Taiwan's Inflation and Inflation Outlook