Thursday, September 24, 2015

Taiwan cuts rate 12.5 bps, first change since June 2011

    Taiwan's central cut its policy rates, including the benchmark discount rate, by 12.50 basis points, to "help maintain price and financial stability and foster economic growth," and said it would "undertake appropriate monetary policy actions so as to fulfill the statutory objectives of central bank operations."
    It is the first change in rates by the Central Bank of the Republic of China (Taiwan) (CBC) since June 2011 and the first rate cut since February 2009.
    In addition to the cut to the discount rate to 1.75 percent, the CBC cut the rate on collateral accommodations to 2.125 percent and the rate on accommodations without collateral to 4.0 percent with effect from Sept. 25.
    But the rate cut was not unexpected following a report from Reuters earlier this week that said the central bank in a report to the legislative session had said it may cut its rate this week.
    The CBC, which said its board was unanimous in its policy decision, confirmed its view that the exchange rate of the Taiwan dollar was in principle determined by financial markets but in the event of "excess volatility and disorderly movements" in the exchange rate, it would "step in to maintain an orderly market."
     In its comment on economic developments, the CBC pointed to the slowing economy in China and the depreciation of the yuan which has created spillover effects that led to a postponement of a rate hike by the U.S. Federal Reserve and volatility in international financial markets.
    "Consequently, uncertainties continue to surround the growth prospects of the global economy," the CBC said, and the global economy had yet to stabilize.
    Inflation in Taiwan has been negative for the last eight months, with an average rate of minus 0.62 percent, mainly due to declines in energy-related prices. In August inflation was minus 0.45 percent and the CBC said excluding prices of fruit, vegetables and energy, the average core inflation rate rose by 0.82 percent.
    Inflation is forecast by the government statistics office to average minus 0.19 percent for 2015 and then rebound to 0.74 percent in 2016, echoing the recent report's finding that the central bank does not expect a risk of deflation despite the decline in consumer prices in recent months.
    The Taiwan dollar has been depreciating since May and fell sharply in response to the CBC's rate cut. It was trading at 33.2 to the U.S. dollar today, down from 32.9 yesterday, and down 4.5 percent since the start of the year.

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

"I.    Global economic and financial conditions
In recent months, the US and the euro area both posted steady economic growth. Nevertheless, amidst China's slowdown, international commodity prices declined and export growth stagnated in many Asian economies. International institutions continued to revise down their growth projections for emerging market economies for this year. These developments indicate the global economic recovery has yet to stabilize.
The Chinese economy is slowing and the renminbi depreciation has created spillover effects. The US Fed postponed its rate hike, and international financial markets remain highly volatile. Consequently, uncertainties continue to surround the growth prospects of the global economy.

II.    Domestic economic and financial conditions
1.   Exports continued to record negative growth for several months on account of tepid external demand. The manufacturing purchasing managers' index (PMI) continued to contract. Meanwhile, the consumer confidence index has fallen for four consecutive months. As a result, private investment and private consumption weakened. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts the domestic economy to expand by 1.01% for the second half of the year, down from the 2.14% of the first half. For the year as a whole, Taiwan is forecast to achieve a growth rate of 1.56%, markedly lower than that of potential output.
Labor market conditions showed steady improvement, and the number of employed persons continued to increase. The unemployment rate rose to 3.90% in August, reflecting seasonal factors; it averaged 3.73% for the first eight months. Average real monthly earnings for the industrial and services sectors grew by 3.53% for the first seven months of the year.
2.   The CPI annual growth rate has stayed in the negative territory for the past eight months, with an average rate of -0.62%. This was mainly due to the sizable declines in energy-related prices of oil, electricity, and fuel. After excluding prices of fruit, vegetables, and energy, the average core inflation rate increased mildly by 0.82% over the same period. The DGBAS forecasts inflation to register -0.19% for this year as a whole; the CPI annual growth rate is projected to rebound to 0.74% next year, with a mild outlook for inflation.
3.   The CBC has continued to conduct open market operations to maintain banks' excess reserves at an accommodative level. The annual growth rate of the monetary aggregate M2 for the first eight months of the year averaged 6.36%, close to the upper threshold of the target range (set at 2.5% to 6.5% for 2015). Given the recent moderation in economic activity, weak demand for funds, and subdued inflation expectations, both short- and long-term interest rates had generally trended downwards.

III.    Monetary policy decision at the Board Meeting today
In sum, the global economy is experiencing a slow recovery and many uncertainties remain. Meanwhile, the domestic economy moderates, the negative output gap widens, the inflation expectations are mild, and real interest rates stay relatively elevated (see Appendix 1). Against this backdrop, the Board judged that a policy rate cut will help maintain price and financial stability and foster economic growth. The CBC will continue to closely monitor both international and domestic economic and financial developments, and undertake appropriate monetary policy actions so as to fulfill the statutory objectives of central bank operations.
The Board reached a unanimous decision on policy rates:
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 1.75%, 2.125%, and 4%, respectively, effective from September 25, 2015.
IV.    Looking at the property market, banks' management of real estate-associated credit risk has already improved, and the government's measures to sustain housing market soundness have gradually come into effect. Real estate speculation has been more contained, along with slower property transactions. The Executive Directors of the CBC, taking these developments into consideration, announced some adjustments to the targeted prudential measures regarding real estate lending on August 13, 2015 (see Appendix 2).
Regulations on real estate lending are consistent with the actual credit extension practices of banks and rules on mortgage lending apply to individuals and not households, a gentle approach within a reasonable scope. As real estate market soundness is vital to financial stability, the CBC will continue to monitor banks' management of real estate-associated credit risk and the enforcement results of targeted macro-prudential measures, and undertake appropriate policy actions to ensure financial stability.
V.    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 step in to maintain an orderly market."


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