Taiwan's central bank held its benchmark discount rate steady at 1.88 percent, unchanged since June 2011, saying domestic economic growth should improve next year due to better exports and a slight improvement in private consumption but the momentum of industrial investment is still insufficient.
The Central Bank of the Republic of China (Taiwan) noted the government's statistics office was forecasting economic growth next year of 2.59 percent, up from an expected 1.74 percent this year, and 2014 inflation of 1.21 percent, up from an expected 0.94 percent this year.
Last month the government trimmed its 2013 growth forecast from a previous 2.31 percent and its 2014 forecast from a previous 3.37 percent. The 2014 inflation forecast was previously 1.39 percent.
The decision by the central bank was widely expected and the bank also decided to maintain its current M2 money supply growth target at 2.5-6.5 percent for 2014 in light of an expected gradual improvement in the global economy and the lack of inflationary dangers. Oil prices next year are expected to be slightly lower, grain prices to rise gently and global inflation to remain moderate.
Taiwan's Gross Domestic Product expanded by 0.27 percent in the third quarter from the second for annual growth of 1.66 percent, down from 2.69 percent in the second quarter. The headline inflation rate in November was 0.67 percent, marginally higher than October's 0.64 percent.
The central bank introduced further prudential measures and urged banks to exercise caution in real estate lending and asked banks to pay close attention to their credit risk management.
The central bank said it had learned that some banks had made high-value housing loans without fully complying with its principles and a few banks were also found to have used inadequate due diligence when approving loans for industrial use.
"Financial institutions obtain most of their funding from the public and should fulfill their role as intermediaries and protect depositors' rights and keep from using depositors' money to fuel real estate speculation," the bank said, appealing to banks to enhance their risk management and refrain from relying solely on collateral appraisal or borrowers' status to grant large credit lines.
The central bank also said it would maintain order in the foreign exchange market to avoid excessive exchange rate volatility and disorderly movements.
The bank is setting aside US$ 20 billion from its foreign exchange reserves, 1.0 billion euros and 80 billion yen in seed capital to participate in the Taipei foreign currency call loan market to meet demand for year-end funding amid tight funding conditions and rising global interest rates by companies in need for foreign current for working capital or overseas merger and acquisitions.
The Taiwan New Dollar has been depreciating since mid-October, trading just below 30 to the U.S. dollar today compared with 29.32 on Oct. 18. This year the TWD is down just over 3 percent from 29.05 on Dec. 31, 2012.
Economists are currently expecting the central bank to raise interest rates in the first quarter of 2014 due to the inflationary impact of higher electricity prices.