Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: December 28, 2006
Monetary Policy Decisions of the Board Meeting
I. The Board 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 2.75%, 3.125% and 5.0%, respectively, effective on December 29, 2006. The decision is based on the following factors:
1. With a pickup in domestic demand offsetting a slowdown in external demand, the economy is expected to continue with moderate growth in 2007.
Taiwan recorded steady growth this year. For next year, a slowdown in global growth may hamper Taiwan's export expansion, but private consumption is likely to recover. The Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan forecast GDP growth to remain moderate next year at 4.14%.
2. CPI inflation may edge up in 2007.
CPI inflation remained at low and stable levels this year. For the first eleven months of this year, CPI and core CPI inflation were 0.59% and 0.52%, respectively. For next year, high raw material prices will push up WPI inflation, which will gradually feed into general prices. This factor, on top of the low-base effect, will cause CPI inflation to edge up to 1.52%, according to the DGBAS.
3. Excess reserves, reserve money, bank credit, and M2 have all stayed at reasonable levels.
In the first eleven months of this year, excess reserves averaged NT$5.7 billion, while the year-on-year growth rates of reserve money and bank credit were 5.37% and 6.30%, respectively. During the same period, the broad monetary aggregate M2 grew by 6.25%, staying within CBC's 3.5% to 7.5% target zone.
4. Despite a rise this year, real interest rates remain below the neutral level.
In the context that Taiwan's economic growth will remain moderate next year, that CPI inflation may edge up, and that real interest rates are still low, the Board judged that the fine-tuning of the policy rate will help preempt inflationary risk, foster efficient fund allocation and long-term financial stability, as well as promote economic growth.
II. The NT dollar exchange rate is determined by market forces. However, when seasonal or irregular factors disrupt the market, the CBC will step in to maintain the orderly foreign exchange market.
III. The CBC will pay close attention to economic and financial development, together with future price development, so as to take timely and appropriate measures.
IV. 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 2007 at 3.5% to 7.5%.