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Central Bank of the Republic of China

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Monetary Policy Decision of the Board Meeting

Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: June 25, 2009

Monetary Policy Decision of the Board Meeting

The Board decided to leave the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral unchanged at 1.25%, 1.625%, and 3.50%, respectively.

In recent months, monetary easing and economic stimulus measures adopted by major countries have brought forth favorable developments, and international financial markets have also gradually stabilized. As a result, the global economic downturn has recently shown signs of abating. It is generally anticipated that the world economy will bottom out in the second half of 2009.

According to the Cabinet-level Directorate-General of Budget, Accounting and Statistics (DGBAS), the domestic economy contracted by 10.24% year on year in the first quarter of the year. The slump in export growth was slowing due to a recent surge of rush orders and short-term orders. In terms of domestic demand, consumer confidence is strengthening and private consumption is expected to pick up modestly. Meanwhile, the government's pubic infrastructure investment expansion program will produce positive effects, hence conducive to an economic recovery. However, the conservative view on the outlook among businesses may weigh on private investment and employment. The DGBAS projects a slowdown in the pace of economic contraction in the second and third quarters of the year, and expects the economy to return to positive growth in the fourth quarter this year.

The rebound of international prices of raw materials such as oil and grains since the beginning of this year has been transmitted to some commodity prices in the domestic market. However, the prices of basic consumer necessities have remained relatively stable and the overall price level continues to register a slight decrease. For the first five months of this year, CPI decreased by 0.11% while core CPI increased by 0.84% on a yearly average basis. Domestic inflation is expected to stay in check, as international raw material prices still recorded a considerable decline from the year-ago level and the domestic economy is slowly recovering.

The annual growth rate of M2 averaged 6.75% for the first five months of this year, indicating that the funding conditions remained accommodative enough to provide the liquidity needed to support an economic recovery. Bank credit growth was moderate due to a gloomy outlook, with an average annual growth rate of 2.11% from January to May 2009, still higher than the GDP growth rate. The CBC continues to urge banks to extend credit to support the funding needs of well-managed enterprises.

The CBC's easy monetary policy has helped to keep market interest rates and the rates on mortgages and corporate loans at low levels. Meanwhile, the expansionary fiscal policy has shored up domestic demand. As the economy gradually regains vigor along with stable prices and financial market conditions, the Board judges that the current stance of monetary policy is appropriate. In the future, the CBC will continue to conduct its policy based on the latest information.

The NT dollar exchange rate is determined by market forces, and flexible exchange rates help to mitigate the impact of external shocks. Nevertheless, dynamic stability of the NT dollar exchange rate is essential to maintain macroeconomic stability. Hence, when seasonal or irrational (e.g. huge ''hot money'' flows) factors cause the NT dollar exchange rate to become more volatile than can be explained by economic fundamentals, the CBC will step in to maintain an orderly market.

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