Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: March 27, 2008
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 12.5 basis points each to 3.5%, 3.875% and 5.75%, respectively, effective on March 28, 2008.
2. The Board decided to reduce the required reserve ratio on foreign currency deposits from 5% to 0.125%, effective on April 1, 2008. This action is expected to lower banks' funding costs and narrow the interest rate spread between NT dollar deposits and foreign currency deposits.
3. The Board also decided to adjust the remunerative rates on banks' B reserve accounts with the CBC (currently a uniform annual rate of 1.5%) by type of deposits. Effective on April 1, 2008, reserves in banks' B accounts from demand deposits will receive an annual rate of 0.25%, and those from time deposits will receive 2.75%. This change aims to reflect banks' funding costs, guide an adjustment in banks' deposit structure, and reduce the liquidity of overall outstanding deposits.
4. 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. In view of the increased volatility recently, the CBC has put new emphasis on the importance of risk hedging for importers and exporters. To help small and medium-sized enterprises (SMEs) hedge currency risk with foreign exchange forwards, the CBC has coordinated with the SME Credit Guarantee Fund to offer necessary guarantees and accommodations.
5. Article 18 of the "Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals" stipulates that foreign investors can open an NT dollar demand deposit account with a local financial institution only for the purpose of securities settlements. During this year, net capital inflows have reached NT$420.6 billion, with only a small portion used for investment in Taiwan's stock market, while a large part of the inflow went into government bonds and NT dollar deposits. This is inconsistent with the regulations. The CBC reiterates that foreign investors should comply with relevant laws and utilize inward remittances in accordance with their reported purposes.
II. The decision to raise rates is mainly based on the following considerations:
1. Rising inflationary pressure
The hike in international oil and commodity prices has been feeding into domestic retail prices. Combined with extreme weather-induced crop damage and a low-base effect, the CPI is forecast to rise by about 3% year on year in the first half of 2008. Despite the projected moderation of inflation pressure in the second half of the year, CPI inflation this year is likely to go above the target ceiling of 2% set by the Council for Economic Planning and Development.
2. Economic growth remains solid
Though a slowdown in the pace of global economic expansion could dampen Taiwan's export growth this year, the economy is expected to grow favorably, led by steady increases in private consumption. According to the Directorate-General of Budget, Accounting and Statistics, GDP is projected to grow by 4.32% this year, close to the average of the last decade.
3. Real interest rates remain low
With the expected increase in inflation this year, real interest rates will likely trend downwards.
Maintaining price stability is the primary goal of the CBC. In the context of surging international energy, raw material and commodity prices, an upward pressure on domestic oil and electricity prices, and the solid growth of Taiwan's economy, the Board decided to continue fine-tuning the policy rates. Such a stance will help ease inflation expectations, promote efficient fund allocation, and safeguard long-term financial stability. Given the uncertainties surrounding economic and financial conditions both at home and abroad, the CBC will continue to pay close attention and adopt timely and appropriate measures when necessary.