Central bank upgrades Taiwan's GDP growth forecast for 2024

Taipei, June 13 (CNA) The Central Bank of the Republic of China (Taiwan) announced Thursday that it has raised its forecast for Taiwan's gross domestic product (GDP) growth in 2024 to 3.77 percent from an earlier estimate of 3.22 percent made in March.

In a statement released after it wrapped up a quarterly policymaking meeting, the central bank said the export-oriented local economy has benefited from growing global demand for emerging technologies such as artificial intelligence development.

But due to a relatively high comparison base last year, the central bank said Taiwan's GDP growth for the second half of this year is expected to lag behind the first half.

Despite raising its GDP forecast, the central bank was still more cautious than the Directorate General of Budget, Accounting and Statistics (DGBAS), which forecast Taiwan's economy will grow 3.94 percent in 2024 after better-than-expected growth of 6.56 percent in the first quarter, above the previous estimate of 6.51 percent.

Inflation

While the central bank raised its economic growth forecast, it did the opposite regarding inflation forecasts by lowering its estimate for Taiwan's consumer price index (CPI) growth for 2024 from 2.16 percent slightly to 2.12 percent.

The central bank also cut the growth forecast for core CPI, which excludes vegetables, fruit and energy, from 2.03 percent to 2.00 percent.

Although 2.12 percent CPI growth still topped the 2 percent alert set by the central bank, the bank said anticipated inflation will moderate from a 2.49 percent increase in 2023. Core CPI growth in 2024 will also fall from an increase of 2.58 percent a year earlier according to the central bank.

After its surprise rate hike by 12.5 basis points in March, the central bank said, inflationary pressure in Taiwan shows signs of moderating.

The central bank added it is possible CPI will continue to fall at a moderate pace in the second half of this year.

In the first five months of the year, Taiwan's CPI grew 2.24 percent from a year earlier, topping the 2 percent target.

Amid eased concerns about inflation, the central bank has decided to leave its key interest rates unchanged in the Thursday meeting.

After the decision, the discount rate remains at 2 percent which is still the highest in 15 years, with collateral at 2.375 percent, and the rate on accommodations without collateral at 4.250 percent.

The central bank said it will continue to keep a close eye on how inflation evolves and adjust its monetary policy to stabilize consumer prices and financial conditions in the country accordingly.

Liquidity tightening measures

Despite leaving its key interest rates intact, the central bank has decided to raise the Taiwan dollar required deposit reserve ratio, which is the proportion of deposits regulators require banks to hold in reserve and not loan, by 25 basis points, effective from July 1.

The central bank said the hike in the required deposit reserve ratio is expected to slow down the pace of liquidity entering the property market and eventually cool the home market at a time when there has been an outcry over soaring home prices among potential young home buyers.

In addition to the hike in the required deposit reserve ratio, the central bank also lowered the ratio of mortgages to the value of an individual's second home in certain areas from 70 percent to 60 percent as its sixth round of selective credit controls to rein in manipulation in the property market.

In June 2023, the central bank announced the fifth round of selective credit controls on the home market by imposing a mortgage ceiling of 70 percent of the value of an individual's second home in the six largest cities -- Taipei, New Taipei, Taoyuan, Taichung, Tainan, Kaohsiung as well as Hsinchu City and Hsinchu County, the eight major property markets in Taiwan.

The new selective credit controls are scheduled to take effect Friday, the central bank said.

Lessons from GFC

Speaking with reporters after the policymaking meeting, central bank governor Yang Chin-long (楊金龍), said the bank learned from the subprime mortgage crisis in the U.S. market from 2007 to 2010, which was triggered by a steep decline in home prices after the burst of a housing bubble. The subprime mortgage crisis resulted in a global financial crisis and paved the way for recession.

After closely observing the local home market, Yang said, the central bank saw signs of some developments potentially leading to a bubble in the home market, urging the Bankers Association of the Republic of China to keep on high alert.

The number of transactions of homes, offices and shops in the six largest cities increased 30 percent in the first five months of this year from a year earlier, although the central bank has introduced five rounds of selective credit controls since December 2020.

Yang said he was cautious about the possible high ratio of mortgages to banks' total lending and the likely high bad loan ratio of mortgages, which could cause delinquencies, foreclosures, and devalue home prices.

The central banker said he is concerned about whether banks' capital adequacy ratios can handle a worst-case scenario in the local financial market.

So far, however, he remains comfortable about the current situation, Yang said

Property market in focus

The sixth round of selective credit controls and a hiked required deposit ratio aims to signal to the market that the central bank takes the property market seriously, Yang added.

According to the central bank, an increase of 25 basis points in the required deposit reserve ratio is expected to take back about NT$120 billion (US$3.71 billion) in funds from the market.

The central bank said it will watch the local property market closely and possibly make adjustments in its selective credit controls in a bid to ensure the local financial market remains stable.

In response, Yung Ching Group, a local property agency said, as the central bank did not raise interest rates this time, the latest round of selective credit controls is unlikely to cool the local home market as the bank anticipates.

Huang Shu-wei (黃舒衛), a section director of multinational asset management company Colliers, said the attempt to cool the local home market will have a limited effect, while he expressed concern the move will distort a market where home buyers need a second home to replace their original ones for self-dwelling purposes.