Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: June 24, 2010

Monetary Policy Decisions of the Board Meeting
I. At the meeting today, the Board reached the following decisions:
1. The Board decided to raise the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 12.5 basis points each to 1.375%, 1.75%, and 3.625%, respectively, effective from June 25, 2010.
2. Pursuant to Articles 28, 29, 31 of the Central Bank Act, and Paragraph 2, Article 37 and Article 40 of the Banking Act, the Board announced the Regulations Governing the Extension of Housing Loans in Specific Areas by Financial Institutions (hereinafter referred to as the Regulations), effective from June 25, 2010.
II. The decision to raise the policy rates is based on the following considerations:
1. The global economy has continued to recover since the beginning of this year. On the domestic front, exports and capital expenditure have both registered significant growth, largely bolstered by growing demand from emerging Asian economies and other major trade partners. In addition, a moderate increase in private expenditure has been supported by improving labor market conditions. As a result, Taiwan's economy has expanded strongly by 13.27% in the first quarter of 2010. The better-than-expected economic performance has prompted many institutions to revise upwards their 2010 growth projections for Taiwan. In May, the Directorate-General of Budget, Accounting, and Statistics (DGBAS) also raised its forecast for Taiwan's 2010 GDP growth rate from 4.72% to 6.14%.
2. Rising worldwide demand has pushed up the prices of international raw material, including crude oil, which has subsequently fed into domestic retail prices. Taiwan's annual CPI growth averaged 1.19% for the first five months of this year. The DGBAS revised its forecast of CPI annual growth rate from 1.27% to 1.40% for this year.
3. Against a backdrop of economic recovery both at home and abroad, the CBC has gradually removed its quantitative easing policy since the second half of 2009. Excess reserves in the banking system have fallen to a normal level, and the overnight lending rate has gradually edged up. The M2 annual growth rate has returned to around the median of the 2010 target zone. Since this April, the CBC has, when necessary, issued 364-day certificates of deposit (CDs) totaling NT$300 billion to mop up excess liquidity. This has an effect equivalent to increasing the required reserve ratio by 1.19 percentage points.
As domestic economic recovery accelerates, bank credit and market interest rates have increased, along with rising property and consumer prices. Against this backdrop, the Board believes that the policy rate increase will gradually guide market rates back to normal and support the CBC's efforts to maintain price and financial stability. Going forward, the CBC will continue to adopt appropriate monetary policy in a timely manner in response to new economic and financial developments.
III. The Regulations Governing the Extension of Housing Loans in Specific Areas by Financial Institutions have been enacted with the following considerations in mind:
1. The total value of real estate loans (for home purchases, home renovations, and building construction) extended by all banks have amounted to 38.3% of their total lending ¹, a value equivalent to 52.0% of GDP. Meanwhile, a large portion of newly extended mortgage loans has concentrated in or around Taipei City and 10 other cities in Taipei County. The concentration of lending may undermine the effectiveness of risk management of banks.
2. In recent years, the increase in housing prices has been more pronounced in the Taipei metropolitan area, adding to the burden of homebuyers. Moreover, this area has posted higher price-to-income (PTI) ratios and loan-to-income (LTI) ratios ²  than elsewhere in Taiwan.
3. The CBC has actively urged banks to closely monitor mortgage-lending risks since October 2009. In March 2010, the CBC asked banks to reduce loan-to-value ratios, raise interest rates, and remove grace periods related to loans for investment properties. Furthermore, the CBC has conducted a round of targeted examinations related to real estate lending.
4. Through these targeted examinations, the CBC has found most of the banks have monitored mortgage lending risks effectively, but there are some exceptions. In addition, it was felt that clear and consistent regulations will help address the risks associated with mortgage lending.
5. Financial institutions obtain most of their funding from the public. Therefore, to protect depositors' rights and prevent borrowers from taking on excessive risks, to urge financial institutions to better manage credit risk, and to promote financial stability, the Board judges that it is necessary to take moral suasion one step further and put in place concrete and explicit regulations. Aimed mainly at high-risk real estate lending, the Regulations are not designed to and will not affect most borrowers.
The Board calls on banks to exercise caution not only with respect to the value of collaterals but also on borrowers' debt repayment ability. In addition, the Board advises banks to pursue business across a broader spectrum of products and services, to achieve risk diversification and ensure sound operation.
6. The government has been working to facilitate the Plan to Enhance the Soundness of the Housing Market, which was announced in April. The Regulations announced today are conducive to accomplishing one of the Plan's objectives, namely ''enhancing risk management for real estate loans.'' However, sound development of the housing market must rely on further concerted policy efforts under the framework of the Plan.
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, excess volatility and disorderly movements in exchange rates due to seasonal or irregular factors (such as massive flows of short-term capital) have adverse implications for economic and financial stability. Hence, when the NT dollar exchange rate becomes more volatile than can be explained by economic fundamentals, the CBC will step in to maintain an orderly market.
V. The CBC continues to urge foreign investors to deploy their funds for securities investment in a manner consistent with their declaration statements. The CBC will monitor the movements of these funds closely.

¹Of the components, loans for home purchases take up a share of 27.9%, home renovations 4.2%, and building construction 6.2%.

² ratio is the ratio of median market home price to median annual household income, and LTI ratios is the ratio of the amount borrowed to income.

Appendix

Key Points of the Regulations Governing the Extension of Housing Loans in Specific Areas by Financial Institutions³(Hereinafter the Regulations)

³The content of the Appendix is provided as a summary of the Regulations and should not be considered or used as the official English translation of the Regulations.