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Press Releases

Monetary Policy Decisions of the Board Meeting

Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: September 30, 2010

Monetary Policy Decisions of the Board Meeting
I. At the meeting today, the Board reached the following decisions:
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 1.50%, 1.875%, and 3.75%, respectively, effective from October 1, 2010.
II. The decision to raise the interest rates is based on the following:
1. Robust growth in emerging Asia helped drive up Taiwan's exports and private investment. Private consumption also rose steadily. Taiwan's economy expanded strongly by 12.53% in the second quarter of 2010. Despite recent signs of moderation in the global recovery, Taiwan showed strength in exports, export orders, industrial production and wholesale and retail sales. The unemployment rate also declined in August. Against this backdrop, the Directorate-General of Budget, Accounting, and Statistics (DGBAS) projects that Taiwan's GDP will grow by 8.24% for the year of 2010 and by 4.64% in 2011.
2. For the first eight months of the year, the CPI has risen by 0.99% compared to the same period of last year. Rising international prices of grains and other raw materials may continue to push up domestic retail prices. According to the DGBAS, Taiwan's annual CPI growth rate is expected to be 1.23% this year, and 1.43% next year.
3. Amid the economic recovery, bank credit has increased steadily and the overnight call-loan rate has trended up. The M2 annual growth rate has remained close to the median of the 2010 target range (2.5%-6.5%). To ensure that liquidity in the banking system is kept at appropriate levels, the CBC has, in addition to accepting banks' re-deposits and issuing short-term certificates of deposit (CDs), held auctions of 364-day CDs each month since this April. So far, the amount of 364-day CD auctioned has totaled NT$600 billion, carrying a liquidity draining effect equivalent to increasing the required reserve ratio by 2.35 percentage points.
After carefully weighing against the backdrop of a steady recovery, upward market interest rate movements, and modest rises in consumer prices, the Board believes that a further policy rate increase will continue to guide market rates back to normal levels gradually, consistent with the CBC's operational mandate to maintain price and financial stability. The CBC will continue to adopt appropriate monetary policy in a timely manner in response to new economic and financial developments.
III. The information received since the Board Meeting last convened indicated reduced amount granted for new loans and lower loan-to-value (LTV) ratios for second (or more) home mortgage lending in the ''specific areas'' (as prescribed in the Monetary Policy Decisions of the June 24 Board Meeting). Furthermore, easing concerns of over-concentration in banks' loan portfolios and higher interest rates have facilitated better risk management and sound operations for banks.
In spite of a wider gap between the asking price and the final sale price, as well as a drop in the number of home sales in the ''specific areas'' in recent months, housing prices have remained high. The CBC will continue to implement the targeted prudential measures promulgated after the last Board Meeting.
Since this July, the CBC has called for banks' efforts to curb real estate speculation. Banks were also urged to apply prudent loan terms to large-scale financing for high-priced land purchases and to perform diligent evaluation and property appraisals on land development projects and collaterals.
Financial institutions obtain most of their funding from the public. Therefore, to protect depositors' rights and discourage land speculation fueled by easy credit, the Board judges it important to further urge banks to enhance risk control associated with land acquisition financing. Banks are urged to formulate appropriate policies and rules for vacant land mortgage lending, to require concrete and detailed plans for construction projects, and to apply reasonable LTV ratios and interest rates. Looking ahead, the CBC will continue to closely monitor future developments and is prepared to take action as warranted in a timely manner.
The targeted prudential measures introduced by the CBC are an integral part of the efforts to enhance risk management for real estate loans as in the government's ''Plan to Enhance the Soundness of the Housing Market'', which was announced in April. However, sound development of the housing market must rely on concerted policy efforts from various government agencies and institutions.
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, when seasonal or irregular factors (such as massive flows 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.