Thursday, March 24, 2016

Taiwan cuts rate to boost growth, stem capital inflows

    Taiwan's central bank cut its policy rates, including the benchmark discount rate, by a further 12.5 basis points, as expected, to help maintain financial stability by stemming the inflow of capital and stimulate the economy.
   The Central Bank of the Republic of China (Taiwan) has now cut its rates three times since September 2015 by a total of 62.5 basis points, with the discount rate now at 1.50 percent, the rate on accommodations with collateral at 1.875 percent and the rate on accommodations without collateral at 3.75 percent.
    The monetary easing is in response to a "sluggish" pace of economic growth in export-dependent Taiwan along with "surges of capital inflows to the domestic market - a reaction to easing in Japan and Europe - that have pushed up the exchange rate of Taiwan's dollar.
    "To maintain financial stability while taking into consideration subdued inflation expectations and a widened negative output gap, the Board judged that reducing policy rates will help create a stable financial environment and in turn stimulate the economy," the central bank said.
   The central bank added that volatile global financial markets had disrupted domestic foreign exchange and financial markets and confirmed that if there are "disorderly" movements in the exchange rate it would step in to maintain an orderly market.
    Taiwan's dollar depreciated from May 2015 until late January this year but since then it has been firming. Today it was trading at 32.5 to the U.S. dollar, up 1.4 percent since the start of this year.
    In 2015 the Taiwan dollar (TWD) depreciated by 4.2 percent against the U.S. dollar.
    The weakening of the global economy has led to declining exports - they fell by an annual 11.8 percent in February and have declined for the last year - weighing on production, investment and consumption. Exports account for about 70 percent of Taiwan's output.
    Nevertheless, the central bank said public spending should return to positive this year, helping boost domestic demand. The government still expects the economy to expand quarter by quarter this year and grow by 1.47 percent for the full year. In mid-February it cut the 2016 estimate from 2.32 percent.
    In the fourth quarter of 2015 Taiwan's Gross Domestic Product shrank by 0.52 percent year-on-year, slightly less than the 0.8 percent annual contraction seen in the third quarter.
    The inflation rate jumped to 2.4 percent in February from 0.8 percent in January as crop damage from cold weather pushed up the prices of vegetables and fruit while core inflation, which excludes vegetables, fruit and energy, rose by only 0.73 percent, the bank said.
    For 2016 the central bank said the Directorate-General of Budget, Accounting and Statistics (DGBAS) forecast inflation of 0.69 percent in light of low international commodity prices, including oil, and a wider negative output gap.

   The Central Bank of the Republic of China (Taiwan) issued the following statement:

"I.    Global economic and financial conditions
Since the beginning of the year, growth in the US has slightly moderated and the euro area has stayed on a steady path to recovery, yet Japan's economy has remained sluggish. Overall, advanced economies have exhibited mild growth. Meanwhile, China's slowdown persisted and emerging market economies' momentum to drive global economic growth weakened. In addition, international commodity prices fluctuated at low levels, and geopolitical risks lingered. These developments indicate the global economy remained vulnerable. As a consequence, international forecasting institutions have revised down their growth projections for the world economy for 2016.
Downside risks to the global economy have resulted in volatile movements in international financial markets. With the BoJ's introduction of a negative interest rate policy, the ECB's expansion of monetary easing measures, and the Fed's decision to slow the pace of rate hikes, massive international capital flows rushed back to Asian economies, potentially destabilizing international financial markets in the future.
II.    Domestic economic and financial conditions
1.   As the world economy performed weaker than expected, exports continued to post negative growth, which weighed on economic activity such as production, investment, and consumption. Nevertheless, public spending is likely to return to positive growth this year, conducive to boosting domestic demand. The Directorate- General of Budget, Accounting, and Statistics (DGBAS) forecasts the domestic economy to pick up pace quarter by quarter and expand by 1.47% for the entire year (Appendix 1).
In the labor market, the unemployment rate has inched up since June 2015 amid a slowing economy and reached 3.95% in February this year. Concerned about tepid gains in corporate profits, employers became less willing to increase wages and hiring, resulting in limited wage growth in recent months.
2.   For the first two months of the year, the CPI annual growth rate averaged 1.60% as crop damage from extreme cold weather pushed up prices of vegetables and fruit, while core inflation (excluding vegetables, fruit, and energy) rose at a mild pace of 0.73%. Given that international commodity prices including oil have remained relatively low and that the domestic negative output gap has widened, the DGBAS forecasts a 0.69% CPI growth rate for 2016 and a stable inflation outlook.
3.   In view of domestic growth deceleration and mild inflation, the CBC has continued to conduct open market operations to manage market liquidity conditions at an appropriate and sufficient level. Softened funding demand and continued policy rate cuts have led market interest rates downwards. For the first two months of 2016, the average annual growth rate of bank loans and investments slowed to 4.27% while that of the monetary aggregate M2 edged down to 5.40% for the same period.  
III.    At the Meeting today, the Board decided unanimously on the following measures, effective March 25, 2016:    
1.   The discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral are cut by 12.5 basis points each to 1.5%, 1.875%, and 3.75%, respectively. 
The global economy is still faced with downside risks. The domestic economy is likely to show some signs of improvements but the pace of recovery remains sluggish. Moreover, interest rates across countries have largely trended down following further monetary easing by most of major economies (Appendix 2), inducing surges of capital inflows to the domestic market. To maintain financial stability while taking into consideration subdued inflation expectations and a widened negative output gap, the Board judged that reducing policy rates will help create a stable financial environment and in turn stimulate the economy.  
2.   The Regulations Governing Home Mortgage Loans and Land Loans Extended by Financial Institutions are amended (Appendix 3) to repeal most rules imposed on home mortgage loans and land loans, except for high-value housing loans. 
In the Board's assessment, targeted macro-prudential measures on the real estate sector have proved effective since their introduction in June 2010, and financial institutions have continued to strengthen their internal rules and self-discipline on mortgage-related credit risk. In addition, as the government rolled out several taxation schemes to promote sound development of the housing market, speculative demand has tapered off. Against this backdrop, the Board revised the aforementioned targeted macro-prudential measures. However, a large portion of newly extended mortgage loans remains concentrated on high-value home purchases; therefore, relevant regulations will stay in place. 
The CBC will continue to closely monitor both international and domestic economic and financial conditions and keep watch on banks' real-estate lending and developments in the housing market. Appropriate monetary policy actions will be adopted in a timely manner so as to achieve the operational objectives for the CBC to sustain price and financial stability and foster economic growth.
IV.    Heightened volatility in global financial markets has disrupted domestic foreign exchange and financial markets. If seasonal or 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 legal mandates, step in to maintain an orderly market. "


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