Monetary Policy Decisions of the Executive Directors Meeting
PRESS RELEASE Release Date: February 18, 2009
Monetary Policy Decisions of the Executive Directors Meeting
I. The following decision was made in today's executive directors meeting of the CBC:
The CBC decided to lower the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 25 basis points each to 1.25%, 1.625% and 3.50%, respectively, effective from February 19.
II. The decision is based on the following considerations:
1. Global economic outlook continues to worsen: The global financial crisis triggered by the US housing bust has severely depressed the world economy. In January 2009, the International Monetary Fund (IMF) again slashed its forecast of world economic growth to 0.5% for the year 2009 (compared to 3.4% for 2008), with contraction expected in the US, the euro area and Japan and major slowdown in China and other emerging economies.
2. Steep decline in exports undermines domestic economic activity: Taiwan is a small and highly open economy with external demand as the main driving force for growth. A relatively high degree of concentration in the markets and product lines of exports adds to Taiwan's sensitivity to a global economic downturn. Due to weak external demand, Taiwan's exports suffered increasingly steep declines over the past five months, which has in turn weighed on domestic demand. Rising unemployment, shrinking consumption, industrial production and investment in recent months have led to a gloomy outlook for the domestic economy.
3. Taiwan's economic growth is weaker than expected and may slip to negative territory in 2009: As domestic and external demand weakens, the Directorate-General of Budget, Accounting and Statistics (DGBAS) of the Cabinet today revised its preliminary estimate and projection of Taiwan's GDP growth sharply downwards. For the fourth quarter of 2008, the economy shrank by 8.36% year-on-year, a significant revision from the -1.73% forecast in November 2008. The economy is projected to contract by 2.97% year-on-year for the year 2009, instead of the November 2008 forecast of a 2.12% growth.
4. Inflationary pressure has clearly subsided: Since the second half of 2008, with economic downturn at home and abroad, international oil and other commodity prices have fallen drastically, while domestic inflation has also come down substantially. The DGBAS projects the CPI inflation rate for the year 2009 at -0.82%, down from the previous year's 3.53%.
5. Continuous rate cuts would help boost domestic demand: Including today's action, the CBC has reduced the policy rates seven times in the current round of rate cuts by a total of 237.5 basis points. Lower interest rates can help reduce the funding costs of individuals and enterprises and boost private consumption and investment.
III. The CBC understands that rate cuts affect each group differently; borrowers have interest payment reduced, while depositors receive lower interest income. Nevertheless, to address the current recession, central banks around the world have unanimously cut policy rates. Based on a comprehensive consideration of the overall economy, the CBC believes that rate cuts are necessary to help foster economic recovery, which in the end will benefit everyone.
IV. Faced with the worst economic recession since the Second World War, the IMF urges governments to vigorously implement monetary and fiscal policies to bolster weak aggregate demand. As inflation cools, the CBC continues with monetary easing, while keeping monetary growth at an appropriate level, to stimulate the economy. Meanwhile, the government has also adopted an expansionary fiscal policy. These coordinated policy efforts are expected to help bring economic growth back on track.