Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: December 11, 2008

Monetary Policy Decisions of the Board Meeting
I. The following decisions were made in today's Board meeting:
1. The Board decided to lower the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 75 basis points each to 2%, 2.375% and 4.25%, respectively, effective from December 12.
2. The M2 monetary aggregate serves as an important indicator for the CBC's monetary policy. For October this year, M2 grew by 4.09% year on year, and by an annualized and seasonally adjusted 5.52% over December 2007. Both growth rates fall within the CBC's 2% to 6% target zone for the year 2008. The Board decided to set the target zone of M2 growth at 2.5% to 6.5% for 2009. Taking into account factors affecting the demand for money, the decision is intended to signify an easy monetary policy stance.
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.
II. The decision to cut the policy rates is based on the following considerations:
1. Inflationary pressure subsiding: With a downturn in the global and domestic economy and a sharp decline in international oil and other commodity prices, inflationary pressure previously facing Taiwan has subsided. The Directorate-General of Budget, Accounting and Statistics of the Cabinet projects a mere 0.37% CPI inflation rate for the year 2009.
2. Increased downside risks to economic growth: As external demand weakens amid the global downturn, Taiwan's exports have registered negative growth for three consecutive months. This situation has, in turn, slowed production, consumption, investment and other economic activity. Taiwan's economic growth has fallen into negative territory during the second half of this year. Downside risks to growth remain for the first half of 2009.
In addition, the unemployment rate has increased in recent months. Employees are asked to take unpaid leave, and companies are downsizing. The labor market could soften further in the near future, denting economic growth.
3. Continuous rate cuts help boost domestic demand: Continuous rate cuts since this September, including today's, add up to a reduction of 162.5 basis points. Combined with the measures to support liquidity, such as the expansion of the scope of repo transactions announced on September 25, the effects of an easy monetary policy will be gradually felt. The CBC's recent actions help reduce the funding costs of individuals and enterprises, bolster their demand for bank credit, and encourage banks to extend credit, and are thus expected to boost domestic demand.
III. Given the ample supply of liquidity, the Board would urge banks to fulfill their intermediary function by meeting the funding demand of well-managed enterprises. The Board would also call on enterprises to take advantage of the low interest rate environment. They may borrow long-term and low-cost capital for investment in industrial upgrading to raise their competitive edge in the long run.
IV. The Board understands that rate cuts affect each sector differently in the short run. For example, borrowers will have their interest payment reduced, while depositors will receive lower interest income. Nevertheless, based on a comprehensive consideration of the overall economy, monetary easing is conducive to economic recovery, which in the end will benefit everyone.
V. The Board believes that a sound policy mix is required to effectively stimulate the economy. The CBC has been consistently creating an easy monetary environment. The government has also adopted an expansionary fiscal policy and actively implemented stimulus programs. These coordinated policy efforts will take effects in due course and bring economic growth back on track.

Appendix: Explanatory notes on the money growth target zone for the year 2009

1.     The M2 monetary aggregate exhibited a slower pace of growth since the beginning of the year 2008. Major factors behind this slowdown include a continuous increase in residents' overseas investment and a slackened growth in bank credit. M2 growth has recovered since August, reflecting in part an increase in bank credit growth and repatriation of funds by residents. The CBC's monetary easing measures since September and a lower base effect also supported M2 growth. For October this year, M2 grew by 4.09% year on year. For the first ten months of 2008, M2 grew by 2.06% year on year, falling within the CBC's 2% to 6% target zone for the year.

2.     By incorporating the DGBAS's latest projections of economic growth and CPI inflation into a dynamic simulation of the money demand function, the annual increase in the demand for M2 money is forecast to be 4.3% for 2009. The figure is rounded up to the nearest 4.5% in 0.5 percentage point increments. Given a median of 4.5% and an error bound of plus or minus 2 percentage points, the M2 growth target zone for 2009 is set at 2.5% to 6.5%, an increase of 0.5 percentage point from this year's target zone.

3.     Taiwan's economy is overshadowed by a gloomy global outlook and will likely drag down bank credit growth. Future price trends also remain unclear as international oil prices fall sharply. Rapid cross-border capital movements further complicate the vagaries of global financial markets. An interplay of these factors adds to the uncertainties of M2 growth for next year.