Monetary Policy (Dec.29, 2003)
Central Bank of China
PRESS RELEASE Release Date: December 29, 2003
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MONETARY POLICY
Led by an accelerating US economy, the global economy has begun to stage a
stable recovery since mid-2003. As inflationary pressure remains subdued, major
central banks have continued to maintain a low interest rate policy to create a
favorable financial environment that is supportive to economic recovery. The
global economy is therefore expected to show stronger growth in 2004.
The Taiwan economy has regained its momentum since July 2003. The economy is
picking up as external trade and domestic production continue to expand.
Capacity utilization rate has been increasing. Consumer confidence is on the
rise again, which will further boost the economy. The Central Bank of China (CBC)
therefore projects the economy to grow by 4.19% in the year 2004, with both the
CPI and core CPI edging up by 0.02%. The labor market has seen signs of
improvement due to the economic expansion and the Public Service Employment
Program implemented by the government. In November 2003, the unemployment rate
was down to 4.71%.
On the financial front, short-term market interest rate remained low while
long-term interest rate trended down after bouncing up in midyear. Due to the
economic recovery, rebound bank credit, foreign capital inflows, and trade
surpluses, growth rates of monetary aggregates have all been on the rise in
recent months. From January to November, the monetary aggregates M2, and M2 plus
bond funds expanded at an annual rate of 3.61% and 5.05%, respectively, all
within their respective target zones (1.5% to 5.5% and 3% to 7%). In addition,
the NT dollar exchange rate remained dynamically stable.
Having carefully reviewed all available information related to recent financial
and economic development, the Board of the CBC reached the following decisions
in the meeting on December 29, 2003:
1. In the past three years, the CBC has maintained an easy monetary policy. This
policy has provided considerable support to domestic economic activity. As a low
inflation environment is expected to prevail in 2004, the CBC will continue to
maintain an expansionary monetary stance to further boost domestic demand. The
Board therefore decided to keep the discount rate, the rate on accommodations
with collateral, and the rate on accommodations without collateral unchanged at
their current levels of 1.375%, 1.75%, and 3.625%, respectively.
2. Monetary aggregates are the intermediate targets for monetary policy. After
reviewing factors such as next year's economic growth, price conditions,
differences in the rates of return between domestic and foreign assets, and
influences of financial asset diversification on money demand, the CBC sets the
target zones for M2 growth for the year 2004 at 2.5% to 6.5%, while M2 plus bond
funds 4.0% to 8.0%. The middle lines for both target zones are one percentage
point up from this year.
3. The exchange rate regime in Taiwan is managed float. In principle, the NT
dollar exchange rate is determined by market forces. However, when seasonal or
irregular factors, for example, large and sudden movements of short-term
capital, disrupt the market and result in excessive volatility in the exchange
rate, the CBC will step in to maintain the dynamic stability of the NT dollar
exchange rate, as deemed appropriate, to ensure that the NT dollar exchange rate
reflect economic fundamentals.
4. As the Chinese New Year is approaching, the CBC will provide the market with
sufficient funds through open market operations and discount window
accommodations to meet the liquidity needs of financial institutions.