Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: Jun. 29, 2006
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 2.5%, 2.875%, and 4.75%, respectively, effective on June 30, 2006. The main considerations behind the Board's decision are as follows:
1. Driven by steady growth in the U.S., the euro area and Asia, as well as the robust demand for consumer electronic products worldwide, Taiwan's exports expanded by 12.2% during the first five months of this year. Industrial production also increased 7.9% in the same period. With the global economy and world trade both expected to post stronger growth than last year, Taiwan's output will continue to grow throughout this year. In terms of domestic demand, private consumption was affected by credit and cash card defaults; private investment, on the other hand, will likely return to positive growth this year. Taken together, the economy is forecast to grow by 4.31% in 2006, higher than the 4.09% in the previous year, according to the Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan.
In addition, the capacity utilization rate reached 80.8% in May this year, close to the peak in recent years with limited spare capacity.
2. The labor market has continued to improve. The unemployment rate declined to 3.84% in the first five months of this year, 0.29 of a percentage point lower than the same period last year. Average earnings of manufacturing sector workers rose by 1.93% in the first four months of 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 7.54% in the first five months of this year, causing wholesale prices to increase by 3.00%. CPI inflation was 1.37% during the same period. The DGBAS projects CPI inflation for the second half of this year to be higher than the first half.
4. The broad monetary aggregate M2 grew by 6.69% on average in the first five months of this year, staying within the CBC's 3.5% to 7.5% target zone. Growth of bank credit remained stable. Both long-term and short-term interest rates, despite small rises recently, were still below their normal levels.
5. In the foreign exchange market, while the customary trade surplus has endured this year, the recent capital outflows and increases in foreign currency assets held by residents caused the NT dollar to slightly depreciate against the US dollar. From the beginning of this year to June 28, the NT dollar depreciated by 2.46% against the US dollar but appreciated against the Japanese yen and the euro by 6.37% and 1.91%, respectively.
II. In the context that domestic electricity rates will soon be raised, prices of oil-related products face an upward pressure, capacity utilization rates are high, and real interest rates remain 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.
III. 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. The CBC will continue monitoring liquidity conditions in the banking sector to keep M2 growth within the target zone.
IV. 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.