Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: June 26, 2008

Monetary Policy Decisions of the Board Meeting
I. The Board reached the following decisions in today's meeting:
1. To maintain price stability and contain inflation expectations, 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 3.625%, 4.0% and 5.875%, respectively, effective from June 27, 2008.
The Board also decided to raise the required reserve ratios on NT dollar demand deposits and on NT dollar time deposits by 1.25 percentage points and 0.75 percentage points, respectively, effective from July 1, 2008 (see the Appendix).
2. The M2 target zone for 2008 was previously set at 3% to 7% at the end of 2007. Since then, demand for money has declined as residents seek to increase portfolio diversification and inflation expectations rise. In addition, with the NT dollar appreciation since the start of this year, the book value of foreign currency deposits has decreased when converted into NT dollars. In light of these developments, the Board decided to revise the M2 target zone for 2008 to 2% to 6%.

II. Monetary policy operations are an ongoing process. On a daily basis, the CBC closely monitors funding conditions, and actively conducts open market operations by using certificates of deposit among other tools. The objective is to maintain market liquidity at a reasonable level.
Today's decision is based on the following factors:
1. Rising inflationary pressure
Due to soaring prices of imported energy and food, CPI inflation reached 3.66% for the first five months of 2008. The Directorate-General of Budget, Accounting and Statistics (DGBAS) forecast CPI to rise by 3.29% for this year as a whole. The upward trend in global raw material and commodity prices, on top of the expected hike in domestic oil and electricity costs, could fuel inflation expectations and weigh on economic growth.
2. Solid expansion of Taiwan's economy
Despite a slowdown in the U.S. market, Taiwan's intra-regional trade with other Asian countries remains buoyant. For the second half of the year, more infrastructure works are scheduled and private investment is likely to increase. The DGBAS revised its projection for Taiwan's economic growth this year upwards to 4.78%, anticipating a robust rate of economic expansion.
3. Real interest rates remain low
Higher inflation this year has resulted in relatively low real interest rates. To prevent excessively low real interest rates, which might hamper the efficient allocation of funds, the Board decided to raise the policy rates.
4. To reduce the liquiditiness of money stock
Following the Board's last meeting in March 2008, the annual growth rate of demand deposits has fallen from negative 1.35% in March to negative 1.43% in May, but time deposit growth has risen from 1.65% to 4.18%. The change in the deposit structure has led to a gradual reduction in the liquiditiness of money stock. With M2 growth remaining at an appropriate level, the Board's decision today to raise required reserve ratios will enhance the CBC's reserve money management and guide liquiditiness lower, hence helping stabilize prices.
III. The appreciation of the NT dollar against the US dollar since the beginning of this year has helped mitigate the pressure of imported inflation. For the first five months of this year, import prices in US dollar terms climbed by 20.81%. The rise is lower at 13.62% if measured in NT dollar terms.
IV. 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.
V. In line with its legal mandate to pursue price stability, the CBC is committed to fighting inflation. However, it should be noted that a sound monetary policy is a necessary but not sufficient condition for achieving price stability. Currently, the upward pressure on prices is generated by surging international oil and agricultural product prices. Fighting imported inflation triggered by supply-side factors requires a good policy mix to attain the desired macroeconomic effects.
VI. In response to recent price hikes, the government has implemented a price stability program, as well as measures to help middle- and low-income households. Concerted efforts from various sectors to conserve energy, promote energy efficiency and raise productivity will lower production costs, boost output, and help keep prices in check.

Appendix: Required Reserve Ratios on Deposits and Other Debts
Percentage of deposits
Types of Deposit                                                          Current Ratios            Ratios After Adjustment
Checking Accounts                                                              10.750                             12.000
Passbook Deposits                                                                9.775                             11.025
Passbook Savings Deposits                                                    5.500                               6.750
Time Deposits                                                                        5.000                               5.750
Time Savings Deposits                                                            4.000                               4.750
Other Debts Foreign Currency Deposits                                  0.125                               0.125
Other Items 0.000 0.000