Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: Dec. 22, 2005
Monetary Policy Decisions of the Board Meeting
I. 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 2.25%, 2.625%, and 4.50%, respectively, effective on December 23, 2005. The main considerations behind the Board's decision are as follows:
1. During the second half of this year, driven by solid growth in the U.S. and the euro area as well as steady recovery of the IT sector, Taiwan's exports and industrial production both rebounded. Meanwhile, the government also speeded up the implementation of public construction projects. According to the estimate of the Directorate-General of Budget, Accounting and Statistics (DGBAS), the economy grew at a year-over-year rate of 4.83% in the second half of this year, a substantial improvement from the 2.73% recorded in the first half of the year. For 2005 as a whole, the economy is estimated to grow by 3.80%. The DGBAS expects the growth rate to rise moderately to 4.08% in 2006 with both domestic and external demand staying on a stable growth path.
While the economy was gaining momentum, the capacity utilization rate for October this year reached 81%, close to the highest figure on record.
2. The labor market has continued to improve. The unemployment rate declined to 3.94% in November, reaching the lowest level since April 2001. However, unit labor cost in the manufacturing sector for the first nine months of 2005 increased by 2.61% over the same period last year. In addition, the new labor pension system introduced in July raised the pension contribution of employers. These factors have pushed labor cost higher.
3. The broad monetary aggregate M2 grew by 6.18% on average in the first ten months of this year, staying within the CBC's 3.5% to 7.5% target zone, but slightly above the middle line of the zone. Both the long-term and short-term interest rates have been below their normal levels.
4. In the foreign exchange market, the recent upturn in Taiwan's trade surplus and surge in foreign capital inflows were offset by the increase in foreign currency assets held by residents. Hence, demand and supply were generally in balance and the NT dollar exchange rate remained largely stable. From the beginning of this year to December 21, the NT dollar exchange rates against the currencies of Taiwan’s major trading partners, the US dollar, the Japanese yen and the euro, appreciated by 3.97%, 5.70% and 3.61%, respectively, over the same period last year.
During the first eleven months of this year, import prices increased by 6.66% in US dollar terms, but by only 2.03% in local currency terms. This modest rise reflects the effect of the appreciating NT dollar on curbing the rise in import prices.
5. In the first eleven months of this year, year-over-year CPI inflation averaged 2.31%. The DGBAS expects the CPI inflation rate to decline slightly to 1.52% next year. Nevertheless, the outlook for international oil prices is still unclear, and domestic inflationary pressure still remains.
6. In the context that the domestic economy continues to expand, while inflationary pressure persists and real interest rates remain low, monetary policy should gradually return to a neutral stance. Such a posture will safeguard price stability, foster efficient fund allocation, and promote long-term financial stability. Following from 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 nominal borrowing costs. The banking sector still has ample liquidity to meet the demand for funds.
8. The NT dollar exchange rate is determined by market forces. However, when seasonal or irregular factors (such as massive movements of short-term capital, or "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.
II. The CBC uses monetary aggregate M2 as the intermediate target in the implementation of monetary policy. Having assessed the impact of economic growth, inflation and interest rates on demand for money, the CBC decided to set the target zone for M2 growth for the year 2006 at 3.5% to 7.5%.