Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: September 28, 2006
Monetary Policy Decisions of the Board Meeting
I. Taking into account of recent financial and economic development, the Board decided to raise the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral each by 12.5 basis points to 2.625%, 3.00%, and 4.875%, respectively, effective September 29, 2006. The decision reflects the Board's assessment of the following factors:
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1. Underpinned by external demand, the economy has continued its solid expansion.
The year-on-year economic growth rates for the first and second quarters of this year were 4.92% and 4.57%, respectively. According to the projections of the Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan, economic growth rate for the year 2006 will speed up from the previous year's 4.03% to 4.28%. In regard to contributions to GDP growth, external demand is expected to contribute 3.18 percentage points to this year's economic growth due to the rapid expansion of exports. On the domestic demand side, private consumption has moderated as a result of credit card defaults. Coupled with sluggish investment, domestic demand is expected to contribute only 1.1 percentage points to economic growth this year.
2. Excess reserves, reserve money, bank credit, and M2 have all stayed at reasonable levels.
In the first eight months of this year, the level of excess reserves was NT$ 6.1 billion on average, while the year-on-year growth rates for reserve money and bank credit were 5.55% and 6.87%, respectively. During the same period, the broad monetary aggregate M2 grew by 6.38% on average, and is expected to stay within CBC's 3.5% to 7.5% target zone.
3. CPI inflation has remained subdued, and is forecast to be below 1.8% in 2006.
Due to weak domestic demand and high-base effect on fruit and vegetable prices, CPI inflation for the first eight months of this year was tame at 1.10%. Core inflation was merely 0.55% during the same period. Annual CPI inflation this year is forecast to be 1.80% by the DGBAS, and 1.50% by the CBC, reflecting mild price developments.
Against the backdrop of slackened domestic demand, mild price inflation, and real interest rate remaining below its neutral level, the Board judged that the fine-tuning of the policy rate will safeguard price stability, foster efficient fund allocation, and promote long-term financial stability.
II. The CBC will pay close attention to economic and financial development, together with future price developments, so as to take timely and appropriate measures.