Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: June 30, 2005
Monetary Policy Decisions of the Board Meeting
Having carefully reviewed all available information related to recent financial and economic development, the Board of the CBC 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 2.0%, 2.375%, and 4.25%, respectively, effective on July 1, 2005. The main considerations of the Board's decision are as follows:
1. The International Monetary Fund forecast global growth to slow from 5.1% last year to 4.3% this year. Affected by declining external demand, Taiwan's export growth for the first five months of this year decelerated to 7.6%. In terms of domestic demand, private consumption exhibited stable growth. Private investment grew at a slower pace compared to last year due to the higher base. Nevertheless, ongoing corporate investment projects continued to fuel investment momentum. In the manufacturing sector, the capacity utilization rate was 79.8% in May, close to the peak in recent years, while unit labor cost turned upwards.
2. The labor market has continued to improve. The average unemployment rate for the first five months of this year declined to 4.13% from 4.44% for last year as a whole.
3. With respect to financial conditions, M2 grew by 5.97% on average in the first five months of this year, staying within the CBC's 3.5% to 7.5% target zone. Bank credit grew moderately by 7.70% during the same period. However, both the long-term and short-term interest rates were below their normal levels.
In real terms, the average overnight interbank call-loan rate and ten-year government bond yield were -0.56% and 1.04%, respectively, in the previous year, and -0.44% and 0.18% on June 28, 2005, lower than those in the U.S., the euro area, Japan and South Korea.
4. In the foreign exchange market, Taiwan's trade surplus has shrunk significantly during this year, while short-term capital inflows have been unabated. From April onwards, the NT dollar exchange rate has been relatively stable, remaining between 31.14 and 31.699 against the US dollar.
The NT dollar exchange rate is in principle determined by market forces. However, when seasonal or irregular factors (such as massive movements of short-term capital, the so-called hot money) cause the exchange rate to become more volatile than can be explained by economic fundamentals, the CBC will step in to restore order in the foreign exchange market.
5. Regarding prices, in the first five months of this year, average CPI inflation reached 1.74%, while core CPI grew by 0.77%. The recent resurgence of international oil prices, mounting food prices following floods in southern Taiwan, rising Medicare costs, upward pressure on tobacco surcharge, domestic oil prices and electricity rates all cast a cloud over price stability.
6. Inflationary expectations are still evident, as rising international oil prices continue imposing an upward pressure on public utility rates. Taking the spillover effect into account, CPI inflation for this year may exceed the 1.70% forecast by the Directorate-General of Budget, Accounting and Statistics in May this year.
7. In the context that inflationary pressure continues rising and real interest rates remain low, monetary policy should gradually return to a neutral stance. Such a stance will help maintain price stability and prevent negative real interest rates that could hamper fund allocation and long-term financial stability. In view of the stable economic growth expected for the second half of the year, the Board decided to raise the discount rates by 12.5 basis points.
8. This moderate rate rise will not affect domestic economic activity and will only cause a limited increase in the nominal borrowing costs of enterprises. The banking sector still has ample liquidity to accommodate enterprises' funding needs.