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Central Bank of the Republic of China

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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.
 

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