Monetary Policy Decisions of the Board Meeting
PRESS RELEASE
Release Date: December 31, 2004
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 1.75 percent, 2.125 percent, and 4.0 percent, respectively, effective on December 31, 2004. The main considerations of the Board’s decision are as follows:
1.The International Monetary Fund (IMF) predicted the global economy would register a growth rate of 5% in 2004, marking the strongest growth in 30 years. Due to substantial external demand, Taiwan’s exports continued to expand and recorded an average annual growth rate of 22.3% from January to November 2004. Domestic demand was also on the rise as evident in the rapid growth in private consumption and fixed capital formation. Due to the accelerating growth both abroad and at home, the Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan expects the economic growth rate for 2004 to be 5.93%, the highest figure since 1998.
2.As far as prices are concerned, the DGBAS estimated the consumer prices index (CPI) to be 1.81% this year due to the rise in prices of imports, and fruits, vegetables.
3.The IMF expects the global economy to slow down to 4.3% in 2005, but remain higher than the 3.9% in 2003. Taiwan’s exports may slow as well due to the falling external demand as well as the higher base in 2004. Private consumption and fixed capital formations will continue to expand and the growth rate of government consumption will return to positive territory. The DGBAS expects the domestic economy to grow by 4.56% in 2005.
4.Although international oil prices have edged lower recently, it remains higher than the average of the first half of 2004. The recent appreciation of the NT dollar against the US dollar could help ease the upward pressure on import prices, but import prices still rose 8.92% on average during the first 11-month period of 2004. The increase in the wholesale price index (WPI) was 7.16% during the same period. The rising WPI may have lagged effects on the CPI inflation. Moreover, the capacity utilization rate in the manufacturing sector had reached its peak of 80.2% in November 2004. The gap between actual and potential output have been diminishing. In addition, gross profit margin is rising while the inventory sales ratio is declining.
5.In the labor market, employment conditions have continued to improve. The unemployment rate in November 2004 dropped to 4.14%, lower than the 4.71% recorded in last November.
6.The growth rate of the M2 aggregate remained stable. However, both the long-term and short-term interest rates were below their normal levels. In terms of the average real interest rates, the overnight interbank call-loan rate and the 10-year government bond rate were 1.38% and 2.44% respectively in the previous year. The respective rates dropped to -0.58% and 1.07% during the first 11-month period in 2004.
7.Supply and demand in the foreign exchange market was generally in balance if the irregular net short-term capital inflows is not taking into account. The overall balance of payments is in good shape as the current account has remained in surplus and the ratio of current account surplus to GDP has gradually trended down.
8.The DGBAS projects the consumer price index to rise by 1.88% in 2005, while the projections made by the Asian Development Bank and Global Insight Inc. are 2.0% and 2.1%, respectively. On concerns of the aforementioned factors, fare increases for public transportation, as well as possible hikes in public utilities bills, the 2005 CPI growth rate is likely to exceed 2%.
9.To maintain price stability, to ease inflationary expectations caused by rising public utility rates, as well as to avoid capital mis-allocation and long-term financial instability that might result from a negative real rate, the Board decided to raise its key rates by 12.5 basis points in view of the sustained economic expansion well under way.
10.This moderate rate rise should only have a limited influences on domestic enterprises as the banking sector still have ample liquidity to accommodate their funding needs.
Monetary aggregates serve as the Bank’s intermediate targets for monetary policy. After reviewing factors such as the next year's economic growth, price conditions, and the influence of interest rate movements on money demand, the CBC sets the target zone for M2 growth for the year 2005 at 3.5% to 7.5%.