Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: September 25, 2008
Monetary Policy Decisions of the Board Meeting
I. The Board reached the following decisions in today's meeting:
1. In light of lower inflationary pressure and rising downside risks to economic growth, as well as to reflect movements of market interest rates, the Board decided to lower 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 from September 26, 2008.
2. In view of recent developments in domestic and global economies, the CBC will expand the scope of Repo facility operations. Eligible counterparties include banks, bills finance companies, Chunghwa Post, securities firms and insurance companies. The term of the facility is set within 180 days to provide market access to longer-term liquidity (see Table).
II. The decisions are based on the following considerations:
1. Inflationary pressure subsiding
For the first eight months of 2008, the CPI increased by 4.25% year on year. As international oil and raw material prices have come down from their previous peaks, inflationary pressure is lessened. According to the Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Executive Yuan, CPI inflation will decrease to 2.5% in the fourth quarter and further to 1.91% next year, substantially lower than this year's 3.74%. Research institutions have also reduced their inflation forecasts. Hence, the situation of negative real interest rates is expected to improve.
2. Global downturn overshadows the domestic economy
The ongoing financial market turmoil has severely impacted the global economy. International institutions have unanimously slashed growth projections for major countries. Taiwan's exports face weakening external demand, while private consumption and investment remain sluggish. The DGBAS estimates GDP growth will slow to 3.40% in the second half of this year, but the government's economic stimulus package is expected to help boost domestic demand.
3. The CBC meets the liquidity needs of financial institutions in a timely manner
In response to economic and financial developments at home and abroad, the CBC's ex officio directors meeting held on September 18 decided to reduce required reserve ratios on NT dollar deposits with an estimated effect of injecting liquidity worth NT$200 billion. In addition, banks may use their holdings of certificates of deposit (CDs) and negotiable certificates of deposit (NCDs) issued by the CBC or their redeposits with the CBC to borrow collateral loans or request early withdrawal whenever needs arise. The CBC will also expand Repo operations to ensure sufficient sources of liquidity for financial institutions.
III. 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. The appreciation of the NT dollar against the US dollar since the beginning of this year has helped mitigate imported inflation. For the first eight months of this year, import prices in US dollar terms climbed by 22.26%. This rise is lower at 14.55% when measured in NT dollar terms.