Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: December 24, 2009

Monetary Policy Decisions of the Board Meeting
I. The Board decided to keep 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.
II. The decision is based on the following considerations:
1. Bolstered by fiscal and monetary stimulus in many countries, the global economy is recovering gradually and international financial markets are stabilizing. Still, the outlook remains uncertain. According to the latest forecast of Global Insight, the global economy will grow by 2.8% in 2010, a significant rise from –2.0% in 2009, while inflation will be subdued.
2. Against the backdrop of a recovering global economy, Taiwan's domestic economic activity has steadily picked up. Since the Board's last meeting, export orders, exports, industrial production and private consumption have all improved. Unemployment has also started to decline. The government's public infrastructure projects are also expected to boost domestic demand. According to the projection of the Directorate-General of Budget, Accounting and Statistics (DGBAS), Taiwan's economy will return to a positive growth of 6.89% year on year in the fourth quarter of 2009, and annual growth rate will rise from –2.53% in 2009 to 4.39% in 2010. Nevertheless, as actual output remains significantly lower than potential output, economic growth momentum has room for further increase.
3. Compared with the same period last year, the prices of crude oil and consumer durables have declined. For the first eleven months of this year, Taiwan's CPI and core CPI inflation rates were –0.92% and –0.08% on average, respectively. The DGBAS expects a stable CPI inflation rate of 0.92% for 2010.
4. Bank credit growth, which generally trended downwards this year, has risen for two consecutive months since October as the economy continues to recover. For the first eleven months of 2009, bank credit growth was 0.56% year on year and became higher at 0.87% when including direct finance. Both rates are higher than the forecast economic growth rate for this year. With long-term and short-term interest rates remaining at low levels, lower funding costs for enterprises and individuals could help boost both investment and consumption.
Based on the above factors, the Board judges that the gradual pace of recovery and the absence of inflationary pressure warrant a continuation of its current policy stance. An appropriately easy monetary policy would help maintain the smooth operation of economic activity.
III. The M2 monetary aggregate serves as an important indicator for the CBC's monetary policy. The Board decided to set the target zone of M2 growth at 2.5% to 6.5% for 2010, the same as for 2009. This decision takes into account the growth and inflation outlook for the coming year, as well as the effects of changes in interest rates and other factors on the demand for money (Appendix).
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. Hence, when seasonal or irregular factors (such as massive flows of short-term capital) 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.
V. The recent global financial crisis has highlighted the important role of asset prices. The CBC will monitor asset price movements closely, as it continues adopting appropriate monetary policy in a timely manner in response to the evolving economic and financial conditions both at home and abroad.

Appendix:
Explanatory notes on the money growth target zone for the year 2010
1. Since March 2009, heavy trading in the domestic stock markets, which fueled foreign capital inflows, together with a lower base effect, had led M2 growth to rise progressively to a peak of 8.33% in July. Despite later declines, the M2 annual growth rate for the first eleven months of 2009 still reached 7.32%, exceeding the upper limit of the CBC's 2.5% to 6.5% target zone for the year.
2. In addition to capital inflows, a major reason for M2 to exceed the target has been the easy funding environment created to shore up economic growth amid the global financial crisis without imposing inflationary pressure. After taking into account the DGBAS's latest statistics including economic growth and CPI inflation, the M2 target zone for this year is revised up to 3.5% to 7.5%. Hence, the 7.32% recorded for the first eleven months is still within target.
3. By incorporating the DGBAS's latest projections of economic growth and CPI inflation for 2010 into a dynamic simulation of the money demand function, the annual increase in the demand for M2 is estimated at 4.37% for 2010. The figure is rounded up to 4.5%, the nearest 0.5 percentage point increment. Given a median of 4.5% and an error bound of plus or minus 2 percentage points, the M2 growth target zone for 2010 is set at 2.5% to 6.5%, the same as this year.