The Central Bank of the Republic of China (Taiwan) (CBC) cut its benchmark discount rate to 1.375 percent and has now cut it by a total of 50 basis points since September 2015.
The bank's other key rates, the rate on accommodations with collateral and the rate on accommodations without collateral were cut by the same amount to 1.75 percent and 3.625 percent, respectively, from July 1. The decision of the bank's board was unanimous.
The central bank added that its accommodative monetary policy stance could be complemented by the "flexible application of macro-prudential measures when necessary" while an expansionary fiscal policy and structural reforms may also be implemented to support economic growth.
The CBC also confirmed that it would intervene in foreign exchange markets to maintain an orderly market "if global financial market turmoil created by the UK referendum leads to excess volatility and disorderly movements in the NT dollar exchange rate."
The central bank said last week's vote by the UK vote to leave the EU, known as Brexit, would "likely affect monetary policies of major economies, international raw materials, and in turn, outlook for the global economy."
In addition, the central bank said it would "ensure that market liquidity is sufficient to support regular economic activity," echoing moves by other central banks worldwide.
The rate cut was largely expected by financial markets as sluggish global growth has muted demand for Taiwanese exports and inflationary pressures remain weak.
The CBC noted the government's downward revision of its 2016 growth forecast to 1.06 percent from 1.47 percent in May and the outlook for the domestic economy "might shift towards a more cautious one" in light of increased uncertainty surrounding the global economy.
Taiwan's economy grew by only 0.78 percent in the first quarter from the fourth quarter of last year but on an annual basis it contracted for the third straight quarter. Year-on-year Gross Domestic Product in the first quarter shrank by 0.68 percent following falls of 0.89 percent and 0.8 percent in the preceding two quarters.
The CBC added that the unemployment rate had risen by 0.21 percentage points to 3.88 percent for the first five months of the year, indicating the slowdown was starting to weigh on the labor market.
Taiwan's inflation rate also eased to 1.24 percent in May from 1.87 percent in April with the central bank expecting soft demand and the negative output gap to exert downward pressure in the next six months despite the rebound of oil and commodity prices.
Taiwan's government forecasts annual inflation of 0.63 percent in the second half of this year, down from an average 1.67 percent in the first five months, and 1.09 percent for the full year.
Taiwan's dollar (TWD) depreciated by 4.2 percent against the U.S. dollar last year, dropping from May 2015 until late January this year.
But since then it has been firming and rose further today, probably because financial markets expect the CBC to hold rates.
The TWD was trading at 32.17 to the U.S. dollar today, up 2.5 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
Since the beginning of the year, growth in the US has slightly slowed, while the euro area economy has expanded mildly and Japan has resumed positive growth. Overall, advanced economies have exhibited moderate momentum towards recovery. Meanwhile, emerging market economies have recorded weaker growth. In particular, China's rebalancing and economic slowdown have dampened exports in Asia and world trade. Therefore, international forecasting institutions have revised down their growth projections for the world economy for 2016.
In last week's referendum, the United Kingdom voted to leave the European Union, leading to heightened volatility across global financial markets. Uncertainty over the future developments after the UK referendum will likely affect monetary policies of major economies, international raw material prices, and, in turn, outlook for the global economy.
II. Domestic economic and financial conditions
1. As Taiwan's exports were hit by sluggish global growth, private investment also became subdued as a result. These factors have contributed to less-than-expected economic growth. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecast in May that the domestic economy will grow faster in the second half of the year than the previous half and will expand by 1.06% for the year as a whole. However, as uncertainty over the global economy increased recently, the domestic economic outlook might shift towards a more cautious one.
In the labor market, payroll gains weakened, and the unemployment rate registered 3.88% for the first five months of 2016, a year-on-year increase of 0.21 percentage points. These indicate that the economic slowdown has begun to weigh on the labor market.
2. For the first five months of the year, the CPI annual growth rate averaged 1.67% as crop damage from extreme cold weather early in the year pushed up prices of vegetables and fruit. Excluding vegetables, fruit, and energy items, core inflation rose slightly at 0.82%.
The prices of international oil and commodities have rebounded since the beginning of the year, giving a lift to global inflation. However, soft domestic demand and a negative output gap will tend to exert downward pressures on inflation in the next six months. The DGBAS forecasts the CPI annual growth rate to register 0.63% in the second half of 2016 and 1.09% for the entire year.
3. In the context of stable inflation, the CBC has maintained banks' excess reserves at an accommodative level in order to bolster economic growth. Both long- and short-term market interest rates stayed low. For the first five months of 2016, the annual growth rate of bank loans and investments averaged 4.11%, while that of the monetary aggregate M2 was 4.88% for the same period. Both measures are higher than the economic growth forecast (1.06% for 2016), suggesting ample market liquidity in support of economic activity.
III. Monetary policy decision at the Board Meeting today
In sum, a projected slack in the global economy this year and the fallout from the UK referendum have compounded downside risks to global trade and economic outlook, thus putting a drag on the domestic economic recovery. Taking into account a widening negative output gap while price and financial stability remains intact, the Board judged that a policy rate cut is conducive to economic growth.
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 1.375%, 1.75%, and 3.625%, respectively, effective from July 1, 2016.
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, if global financial market turmoil created by the UK referendum leads 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. The CBC also stands ready to ensure that market liquidity is sufficient to support regular economic activity.
V. Weak global growth in the past few years and recent uncertainty surrounding the international economy could hamper domestic economic growth. The international consensus recommends that the current economic challenges shared by many countries should be addressed rigorously through a policy mix. Therefore, to sustain financial stability, Taiwan's accommodative monetary policy stance at present can be complemented with flexible application of macro-prudential measures when necessary. Moreover, expansionary fiscal policy as well as structural reforms may also be implemented so as to drive continued growth for Taiwan's economy."
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