Taiwan's central bank keeps benchmark rate steady

It's still at 1.875%.

According to DBS, the central bank kept the benchmark rate unchanged at 1.875% yesterday. The official rhetoric in the policy statement should be interpreted as neutral.

The statement said that GDP growth has remained steady, but lower than the long-term potential rate; inflation is under control, although food and oil prices have risen due to the supply side reasons.

Here's more from DBS:

These are in line with our assessment that growth recovery remains tepid and demand-pull inflation is not yet a big risk. We stick to the forecast that the central bank will stay on hold in the next several months before raising rates from December onwards.

In response to the ongoing surge in property prices, the central bank announced to further tighten the regulations on housing mortgage loans. The existing rule, which caps the loan-to-value ratio at 60% for second home purchases, will be applied to more areas in New Taipei city and Taoyuan county.

Other measures also include lowering the LTV ratio from 60% to 50%, for individual borrowers buying the third-home or high-price properties, as well as corporate entities purchasing residential properties.

The decision of tightening mortgage rules shouldn’t come as a surprise. Housing prices have continue to rise strongly in 1Q (Sinyi index: 12.2% YoY), and the rise has spread from Taipei to Taipei’s surrounding areas (New Taipei city: 17.1%, Taoyuan: 12.3%). Meanwhile, growth of housing loans has also showed some signs of a rebound in recent months (4.4% in Jan-Apr, vs. 3.4% in 2013).

Likewise, the rise in loan growth was relatively strong in Taipei’s vicinities (8.1% in new Taipei city & Taoyuan).

As pointed out in the previous write-ups, property cooling measures are possible and the central bank should prefer selective credit controls over rate hikes. Policymakers should take into account that the macroeconomic conditions remain tepid, and the property bubble risk is concentrated in north Taiwan rather than broad-based.

Until the macro environment improves meaningfully and the ratehike conditions are ripe, further tightening of the mortgage rules in designated areas can’t be precluded.