Monetary Policy Decision of the Board Meeting

I.        Global economic and financial conditions

Since the Board met in late December last year, global trade and manufacturing activity has continued to show signs of cooling. International institutions have widely revised down growth projections for the global economy this year, and major economies have mostly witnessed slower growth. Momentum for global economic expansion has weakened and international oil prices are expected to trend lower than last year, indicating a mild global inflation outlook.

Major central banks have maintained policy rates unchanged in recent months, yet they have broadly adopted a more accommodative monetary policy stance. In addition, US-China trade negotiations are likely to achieve positive results, and global financial markets have rebounded significantly. Looking ahead, given lingering uncertainties over the US trade policies toward major economies such as China, the euro area, and Japan, a slowdown in the Chinese economy, and a possible extension of the Brexit deadline, the global economic and financial outlook remains unclear.

II.     Domestic economic and financial conditions

1.    Since the beginning of this year, softened external demand has contributed to negative growth in exports and weighed on production activity. Nevertheless, capital equipment imports have increased and the domestic stock market has rallied on the back of buoyant international stock markets, bolstering consumer confidence. The domestic economy has thus continued to register moderate growth. Labor market conditions have been stable, with employment slightly increasing and the unemployment rate modestly declining.

In light of anticipated slowing in global economic and trade activity this year and a higher base last year, export growth may decelerate in 2019. However, with sustained growth in regular earnings and the government's consumption stimulus measures, private consumption is likely to grow at a steady pace. Meanwhile, as the government has proactively promoted the Forward-Looking Infrastructure Development Program and launched an action plan to welcome investments by Taiwanese companies abroad, both public and private investment will continue to expand. The Bank forecasts Taiwan's economic growth to accelerate quarter by quarter driven by domestic demand. For the entire year, the GDP growth rate is projected to be 2.13%, lower than the previous year.

2.    For the first two months of this year, the consumer price index (CPI) posted an average annual growth rate of 0.20%, and the core CPI also rose mildly by 0.41% in the same period.

In terms of the inflation outlook, a lower base effect as excess supply brought down prices in fruit and vegetables is likely to result in a steeper increase in food prices this year, while a minimum wage hike is expected to boost wage growth and drive up prices in away-from-home food. On the other hand, imported inflationary pressures would be held down by lower international oil prices projected for this year. Combined with moderate domestic demand and a dissipated tobacco tax hike effect, the inflation outlook is stable. The Bank forecasts the annual growth rates of CPI and core CPI (excluding fruit, vegetables, and energy items) for 2019 to be 0.91% and 0.78%, respectively (Appendix Table 1).

3.    Early in the year, demand for funds in preparation for the Lunar New Year holidays was well met as the Bank managed market liquidity through open market operations. Banks' excess reserves climbed to a level higher than NT$50 billion on average for the first two months of the year, from over NT$40 billion of the previous quarter. Meanwhile, both long- and short-term market interest rates slipped slightly downwards in recent months.

In the meantime, reserve money and the monetary aggregate M2 registered average annual growth rates of 6.78% and 3.03%, respectively, while bank loans and investments expanded by 5.70% for the same period, indicating sufficient money and credit growth to support economic activity. Recent data also pointed to satisfactory bank asset quality, with the non-performing loan ratio of domestic banks standing at 0.24% and the loan loss coverage ratio reaching a considerably healthy level of 569.56%.

III.  Monetary policy decisions

The overall assessment based on the above information showed that Taiwan's economy would likely grow at a somewhat slower pace this year against the backdrop of a downward revision of global GDP and trade growth forecasts and persistent uncertainties over the international economic, trade, and financial prospects. In addition, the actual output remains below potential and inflationary pressures are expected to be subdued. Moreover, Taiwan's nominal and real interest rates continue to register around the middle range among a host of economies (Appendix Figure 1 & Table 2). 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 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.

IV.   The Bank will continue to monitor inflation, economic, and financial developments at home, while paying close attention to any possible impacts on Taiwan's economy and financial conditions resulting from shifts in global economic and trade activity, monetary policy of major economies, and cross-border capital flows. We will undertake appropriate and timely 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. Nonetheless, 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 Bank will, in accordance with its mandate, step in to maintain an orderly foreign exchange market.