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Central Bank of the Republic of China

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Monetary Policy Decisions of the Board Meeting

Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: March 29, 2007

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 2.875%, 3.25% and 5.125%, respectively, effective on March 30, 2007. The decision is based on the following factors:
1. Taiwan's economic growth remains solid.
For 2007, a slowdown in global growth may affect Taiwan's export expansion, but private consumption is likely to recover. Moreover, spurred by the Three-Year Sprint Program, government consumption and investment are expected to return to positive growth. The Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan forecast GDP growth to remain solid at 4.30%.
2. CPI inflation increased.
For the first two months of this year, CPI and core CPI increased by 1.04% and 0.76% year on year, respectively, while WPI rose significantly by 6.91%. Rising wholesale prices will gradually feed into general prices. This factor, on top of the low-base effect, will cause CPI inflation to increase to 1.43% in 2007 according to the DGBAS, higher than the 0.6% in the previous year.
3. Both excess reserves and monetary growth stayed at appropriate levels.
The level of daily average excess reserves, which stood at NT$5.9 billion in 2006, increased to NT$31.6 billion in the first two months of 2007, affected by the Rebar Group incident and the lunar New Year. Reserve money increased by 4.7% year on year in the first two months of 2007. During the same period, the broad monetary aggregate M2 grew by 5.38%, staying within CBC's 3.5% to 7.5% target zone.
In the context that uncertainties in international raw material prices weighs on inflationary risk, that domestic housing prices have risen by nearly 20% from a low point in 2003, that economic growth remains solid, and that real interest rates are still low, the Board decided to continue fine-tuning the policy rate. Such a posture will help promote efficient fund allocation, foster a financial environment conducive to economic growth, and maintain low and stable price levels.
II. Over the last decade, the average saving rate (25.8%) exceeds the investment rate (20.7%). Excess savings combined with net capital inflows has created excess liquidity in the private sector. In response, the CBC will regularly issue certificates of deposit (CDs) of long durations to maintain excess reserves at appropriate levels. In addition, the CBC will continue accepting redeposits from banks that show increases in taking term deposits of one-year or more.
III. The NT dollar exchange rate is determined by market forces. However, when seasonal or irregular factors (such as "hot money") disrupt the market, the CBC will step in to maintain an orderly foreign exchange market.
IV. The CBC will pay close attention to economic and financial development, especially future price movements, so as to take timely and appropriate measures.
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