Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: June 21, 2007
Monetary Policy Decisions of the Board Meeting
I. The Board reached the following decisions in today's meeting:
1. The Board decided to raise the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 25 basis points each to 3.125%, 3.5% and 5.375%, respectively, effective on June 22, 2007.
2. The required reserve ratio on foreign currency deposits is raised from 0.125% to 5%, effective on June 22, 2007.
3. 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 an orderly foreign exchange market.
4. As risk is closely related to the rate of return, the Board calls on financial institutions to strengthen risk management. To safeguard the rights of their customers, financial institutions should inform customers of the risk involved in the transactions of financial products, including exchange rate, interest rate and liquidity risk. The Board also urges financial institutions, in line with their role as financial intermediaries, not to refuse to accept time deposits from their customers.
II. The decisions are based on the following factors:
1. Increases in the CPI are projected to widen in the second half of 2007
For the first five months of this year, CPI and core CPI increased by 0.72% and 0.68% year on year, respectively, while WPI rose significantly by 7.39%. Rising wholesale prices will gradually feed into general prices. Moreover, unit labor costs return to positive growth, reversing the decline in previous years. These two factors, on top of the low-base effect, will cause CPI inflation to increase from 0.99% in the first half of this year to 1.93% in the second half, according to the Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan.
2. Market rates have trended up
Since late May this year, both long-term and short-term market interest rates have trended up, as tight funding conditions prompted banks to adopt a cautious attitude towards funds operations.
3. Taiwan's economic growth is expected to rise in the second half of 2007
Taiwan's exports will be bolstered by the steady economic expansion of Asia and the euro area, and the likely recovery of the U.S. Private consumption is also gaining momentum. The DGBAS forecast GDP growth to rise from 4.27% in the first half of this year to 4.48% in the second half.
4. Monetary growth stayed at appropriate levels
Reserve money increased by 6.21% on average in the first five months of 2007. The broad monetary aggregate M2 grew by 5.52% for the first four months of this year, staying within the CBC's 3.5% to 7.5% target zone.
The persistently high international raw material prices, the rise in unit labor costs, and the prospective increase in minimum wages in July all weigh on inflationary pressure. Domestic housing prices have risen by nearly 20% from a trough in 2003. Market rates have also been rising. In view of these factors, the Board decided to raise the policy rates to reflect funding conditions and maintain stable prices and long-term financial stability.
In addition, a wide gap has existed between the required reserve ratios imposed on Taiwan dollar deposits and foreign currency deposits. To lessen the impacts of reserve requirements in guiding the flow of funds, the Board deemed it appropriate to raise the required reserve ratio on foreign currency deposits.