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Central Bank of the Republic of China

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Monetary Policy Decisions of the Board Meeting

Central Bank of China
PRESS RELEASE
Release Date: Mar. 24, 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 1.875%, 2.25%, and 4.125%, respectively, effective on March 25, 2005. The main considerations of the Board's decision are as follows:
1. In terms of domestic demand, with improving employment conditions, private consumption is projected to grow moderately by 3.0% this year. The on-going corporate investment projects is likely to push up private fixed capital formation growth to around 9.0%. Government investment and consumption growth is expected to return to positive territory this year.
2. With respect to external demand, as global economic expansion slows down Taiwan’s strong growth of exports may also wane. Exports grew by 8.3% for the first two months of this year. The Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan forecast Taiwan’s economic growth rate for this year to be 4.21% (the average forecast by major domestic institutions was 4.3%). Actual domestic output has approached the potential output level.
3. The labor market has continued to improve. The unemployment rate for the first two months of this year averaged 4.17%, declining from the 5.35% peak recorded in August 2002.
4. As far as financial conditions are concerned, M2 grew by 6.35% on average in January and February, staying within the CBC's 3.5% to 7.5% target zone. Bank credit grew moderately by 8.20% during the same period. However, both the long-term and short-term interest rates were below their normal levels.
In real terms, the average overnight interbank call-loan rate and ten-year government bond yield were -0.56% and 1.04%, respectively, in the previous year, and -0.46% and 0.72%, respectively, on March 23, 2005, lower than those in the U.S., the Euro area, Japan and South Korea.
5. In the foreign exchange market, under the impact of short-term capital inflows, the NT dollar appreciated against the US dollar by 3.66% between end-2004 and March 10, 2005. However, the appreciation decreased to 1.75% on March 23. When excluding irregular net short-term capital inflows, supply and demand in the foreign exchange market are generally in balance.
6. Regarding prices, average CPI inflation reached 1.22% in January and February. During the same period, core CPI grew by 0.78% and WPI by 3.29%. The appreciation of the NT dollar against the US dollar helps ease the upward pressure on import prices. However, the surging oil prices and rising food prices cast a cloud over price stability.
Moreover, the capacity utilization rate of the manufacturing sector was 80.3% in January, close to its peak in recent years. The gap between actual and potential output has closed up substantially. The DGBAS estimated CPI inflation to be 1.67% this year.
7. Inflationary expectations are on the rise, as rising international commodity prices continue imposing an upward pressure on public utility rates. Taking the spillover effect into account, CPI inflation may exceed the estimated 1.67%.
8. In the context that economic growth is on track, that prices rise and real interest rates are low, monetary policy should gradually return to a neutral stance. Such a stance will help maintain price stability and prevent negative real interest rates from hampering fund allocation and long-term financial stability. In view of the economic growth well under way, the Board decided to raise the discount rates by 12.5 basis points.
9. This moderate rate rise should only cause a limited increase in the nominal costs of enterprises. The banking sector still has ample liquidity to accommodate enterprises' funding needs.
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