Central Bank of China
PRESS RELEASE Release Date: September 30, 2004






Monetary Policy Decisions


The Board of Directors of the Central Bank of China met today to assess the latest economic and financial development in Taiwan. The Board decided to raise the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 25 basis points each to 1.625 percent, 2 percent, and 3.875 percent, respectively, effective on October 1, 2004.



The Board's decision is based on the following considerations:



1. The Taiwan economy grew at a rate of 7.17 percent in the first half of 2004 due to the rise in external demand, an increase in domestic consumption and investment, and a low 2003 base. Against the backdrop of the surge in oil prices, the tightening of China's economic policies, and a rise in the base, the GDP is expected to grow at a rate of 4.68 percent in the second half of 2004. The Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan expects the economic growth rate for 2004 to be 5.87 percent, while the most recent forecast made by the Asian Development Bank (ADB) in September 2004 was 6 percent. The DGBAS predicts that the economy will continue to expand at a rate of 4.49 percent in 2005. The ADB shares the same optimism, projecting a rate of 4.80 percent, a figure that concurs with the potential GDP growth rate estimated by the Council for Economic Planning and Development.



2. The eight-month change, from January to August 2004, in consumer price index (CPI) and the index for consumer prices excluding fresh fruits and vegetables, fish and shellfish, and energy (core CPI) were 1.37 percent and 0.59 percent, respectively. Inflation is expected to rise in 2005 due to a higher capacity utilization rate in the manufacturing sector, the narrowing of the output gap, and the rise in import prices. The DGBAS predicts the CPI inflation to be 1.49 percent for 2004 and 1.58 percent for 2005. The ADB's forecasts are 1.5 percent and 2 percent, respectively.



3. The current account has remained in surplus and the overall balance of payments is in good shape. The interest differential between the US dollar and the NT dollar, however, has widened. Investment in foreign securities by Taiwan residents has increased markedly as a result.



4. The gap between the over-night interbank call-loan rate and the discount rate has narrowed in recent months. The Board believes that this gap should stay within an appropriate range after the latest adjustment.



5. Due to a sustained economic expansion, the inflation risk has risen and short-term real interest rates have turned negative. To contain inflation expectation, the Board agreed that the existing low rates should be raised. This action is consistent with the Bank's neutral policy stance and is conducive to maintaining economic stability.





The Bank is of the view that the new rates remain accommodative and will provide ongoing support to economic development.