Thursday, September 25, 2014

Taiwan holds rate on mild inflation and output gap

    Taiwan's central bank maintained its benchmark rate at 1.875 percent, as expected, saying the decision was "based on the assessment of lingering uncertainties in the global economy, a negative domestic output gap, and a mild outlook for inflation."
    The Central Bank of the Republic of China (Taiwan), which has maintained rates since June 2011, issued the following statement:

    "At the meeting today, the Board decided unanimously to maintain the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral at their current levels of 1.875%, 2.25%, and 4.125%, respectively.

II.The interest rate decisions are based on the following:
1.Recent developments show that the global economy continued to recover, yet the pace of recovery was uneven across major economies. The US and the UK both experienced moderate economic expansion, while China's slowdown endured and growth remained weak in the euro area and Japan. In view of an imminent withdrawal of the US Fed's asset purchase program and more monetary stimulus provided by the ECB, combined with geopolitical risks, uncertainties in the global economy linger. As a consequence, some international agencies recently trimmed down the forecast of the global economic growth for 2014 and 2015. Nevertheless, it is widely projected that the global economy will post a higher growth rate in 2015 than 2014.

2.Meanwhile, the moderate expansion of the global economy is expected to boost Taiwan's exports. However, private consumption growth may be dampened as food safety concerns weigh on consumer confidence. In addition, private investment may increase at a slightly slower pace. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts Taiwan's economy to grow by 3.08% for the fourth quarter, lower than the previous quarter, and projects a growth rate of 3.41% for the entire year. Bolstered by an upturn in the global economy in 2015, both domestic and external demands are likely to increase steadily. Therefore, the domestic economy is projected to expand 3.51% in 2015, slightly higher than this year. 
In terms of labor market conditions, employment continued to rise owing to the pickup in the domestic economy. The unemployment rate for the first eight months of the year averaged 3.99%, the lowest for the same period in the past six years.

3.Supply-side factors such as infected piglets have driven food prices higher since the beginning of this year, pushing the CPI annual growth rate up to 2.07% in August. For the first eight months of the year, the CPI annual growth rate averaged 1.39%. The DGBAS projects inflation to increase slightly by 1.64% for the year as a whole.
Looking ahead, domestic inflation expectations are anticipated to remain mild next year in the context of stable prices of international raw materials, including oil and grains, and a gradual increase in domestic demand. The DGBAS forecasts the CPI annual growth rate to decrease to 1.46% in 2015.

4.Amid an economic recovery, the CBC has continued to manage market liquidity through open market operations to maintain banks' excess reserves at an appropriate level. The overnight interbank call loan rates remained broadly stable, bank credit expanded steadily, and the growth of the monetary aggregate M2 stayed within the target range. The annual growth rate of M2 for the first eight months of the year was 5.83%.
Based on the assessment of lingering uncertainties in the global economy, a negative domestic output gap, and a mild outlook for inflation, the Board judges that a policy rate hold will help maintain price and financial stability and foster economic growth. Going forward, the CBC will continue to closely monitor the economic and financial developments both at home and abroad and employ macro-prudential and monetary policy tools, when warranted, to fulfill its legal mandates.

III.Since the Board's last meeting, when measures were introduced to further enhance banks' mortgage-related risk management, concentration of real estate lending in banks' loan portfolios has eased. Banks were also found to have granted loans for housing in the designated Specific Areas and high-valued housing across the country at lower loan-to-value ratios and higher interest rates. This is conducive to sound banking operation and to the attainment of financial stability.
With respect to loans collateralized against lands classified for industrial use, most banks have responded to the CBC's call for stronger risk management in December last year by formulating internal rules and exercising prudence. Credit growth of this loan category has thus slowed down since the turn of the year. The CBC will continue to keep close watch on banks' lending operation of industrial land collateralized loans and conduct target examinations as needed.

IV.The NT dollar exchange rate is in principle determined by market forces. Nevertheless, when 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 statutory mandates, step in to maintain an orderly market."


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