Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: September 15, 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 2.125%, 2.50%, and 4.375%, respectively, effective on September 16, 2005. The main considerations of the Board's decision are as follows:
1.Although Taiwan's economic growth for the first half of this year was below expectations, the solid growth pace of the U.S., recovery of the IT sector and implementation of the government's public construction projects should combine to speed up Taiwan's economic growth to 4.48% in the second half of this year. In addition to the expansion in demand, the capacity utilization rate of the manufacturing sector for July this year reached 79.6%, higher than the average rate for the past decade.
2.The labor market shows noticeable improvement. The unemployment rate for the first seven months of this year averaged 4.17%, lower than the 4.50% for the same period last year. Unit labor cost in the manufacturing sector reversed the declining trend and grew by 4.5% for the first six months of this year.
3.With respect to financial conditions, M2 grew by 6.10% on average in the first seven months of this year, staying within the CBC's 3.5% to 7.5% target zone but slightly exceeding the median. Both the long-term and short-term interest rates were below their normal levels.
In real terms, the overnight interbank call-loan rate and ten-year government bond yield were -0.52% and 0.99%, respectively, at the end of September last year. Despite the rate hikes since then, they both declined to -0.81% and -0.37%, respectively, on September 13 this year, 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. This factor, coupled with increases in residents' expenses for travel abroad and in insurance companies' foreign investments, caused the NT dollar to depreciate slightly against the US dollar in recent months. However, from the beginning of this year to September 14, the NT dollar still appreciated by 6.01%, 4.67% and 2.64% against the US dollar, the Japanese yen and the euro, respectively, compared to the same period last year. This has helped subdue import prices.
The NT dollar exchange rate is 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 maintain the orderly foreign exchange market.
5.Regarding prices, in the first eight months of this year, average CPI inflation reached 2.13%. The surging international oil prices, mounting food prices following typhoons, rising Medicare costs, and upward pressure on tobacco surcharge, domestic oil prices and electricity rates all cast a cloud over price stability. As a result, CPI inflation for this year as a whole may exceed the 1.97% forecast by the Directorate-General of Budget, Accounting and Statistics in August this year.
6.In the context that CPI inflation has exceeded the 2% ceiling in the National Development Plan drawn by the Council for Economic Planning and Development and that 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. Under these considerations, the Board decided to raise the discount rates by 12.5 basis points.
7.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.