Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: Mar. 30, 2006
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 2.375%, 2.75%, and 4.625%, respectively, effective on March 31, 2006. The main considerations behind the Board's decision are as follows:
1. Driven by stable growth in the U.S., the euro area and Japan, Taiwan's exports expanded by 14.0% during the first two months of this year. Industrial production also increased 8.60% in the same period. The strength of external demand is expected to persist through the rest of the year. In addition, domestic demand picked up as private investment returned to positive growth and the government speeded up the implementation of public construction projects. These positive developments more than offset the negative impact of credit and cash card defaults on private consumption. According to the Directorate-General of Budget, Accounting and Statistics (DGBAS), the economy is forecast to grow by 4.25% in 2006, higher than the 4.09% in the previous year.
2. The labor market has continued to improve. The unemployment rate declined to 3.86% in the first two months of this year, 0.31 of a percentage point lower than the same period last year. Regular earnings of non-agricultural sector workers continued to rise in January this year. The new labor pension system introduced in July last year raised the pension contribution of employers. Both factors have pushed labor costs higher.
3. Reflecting the surge in international oil and commodity prices, import prices denominated in NT dollars rose by 6.08% in the first two months of this year, causing wholesale prices to increase by 1.54%. Consumer prices went up 1.84% during the same period. The DGBAS projects CPI inflation for this year to be 1.71%.
4. The broad monetary aggregate M2 grew by 6.86% on average in the first two months of this year, staying within the CBC's 3.5% to 7.5% target zone. Growth of bank credit remained stable. However, both long-term and short-term interest rates were below their normal levels.
5. In the foreign exchange market, the customary trade surplus was offset by an 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 March 29, the NT dollar depreciated by 2.47% against the US dollar but appreciated against the Japanese yen and the euro by 9.12% and 6.49%, respectively.
6. In the context that prices of oil-related products face an upward pressure, while capacity utilization rates are high and real interest rates low, monetary policy should gradually return to a neutral stance. Against the backdrop of sustained economic growth, 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 for businesses. 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.