Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: March 25, 2010
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. The global recovery has picked up pace since the beginning of this year. International institutions have revised up their projections of global economic growth for 2010. Still, uncertainty remains as governments try to address challenging issues such as high unemployment and huge fiscal deficits.
2. Economic activity in Taiwan has regained momentum since the fourth quarter of 2009. Both exports and industrial production showed remarkable improvements, and firms' capital expenditure also increased. Private consumption is expected to grow moderately due to elevated unemployment and limited wage growth. According to the projection of the Directorate-General of Budget, Accounting and Statistics (DGBAS), Taiwan's economy will grow by 4.72% in 2010.
3. As prices for raw materials, including crude oil, climbed higher when compared with the same period of last year, Taiwan's annual CPI growth rose to 1.30% for the first two months of this year. However, the core CPI inflation remained steady at –0.06%. The DGBAS forecasts an annual CPI inflation rate of 1.27% for 2010. Inflation expectations generally remain subdued.
4. Against the backdrop of a recovering economy, the CBC has adjusted its quantitative easing policy to properly reflect economic conditions while pursuing financial stability. With the increased issuance of certificates of deposit (CDs) by the CBC, excess reserves in the banking system dropped to NT$33.0 billion in February this year from a peak of NT$154.1 billion in April 2009. M2 growth has slowed down since the second half of 2009. For the first two months of this year, the M2 annual growth rate averaged 5.25%, close to the median of the 2010 target zone. Meanwhile, the overnight interbank call-loan rates have trended up recently.
As the economy begins to recover against a backdrop of mild inflation and relatively high unemployment, the CBC is mindful of the need to boost private consumption and investor confidence. The Board judges that the present policy rate setting is appropriate and conducive to sustainable economic growth. In the future, the CBC will continue to adopt appropriate monetary policy in a timely manner to reflect economic and financial developments.
III. Since domestic financial conditions have stabilized, the CBC will, as the circumstances warrant, issue CDs of longer maturities in order to bring down the level of liquidity in financial institutions.
IV. Heightened housing prices and over-concentration of mortgage loans in specific areas in Taiwan have gradually become a source of concern. To address this issue and safeguard financial stability, the CBC has actively adopted a series of targeted prudential measures since October 2009, including the following:
1. In October 2009, the CBC urged banks to contain risks to mortgage lending.
2. During the December 2009 Board Meeting, the Board discussed the issue concerning asset markets, and pointed out in the press release that ''the CBC will monitor asset price movements closely, as it continues adopting appropriate monetary policy.''
3. In January 2010, the CBC issued an official document, asking the Bankers Association to remind mortgage borrowers of an increase in monthly installment repayment and possible interest rate changes upon the expiration of grace periods.
4. The CBC has urged banks to enhance risk control over home loans granted to real estate investors (for non-residential purposes) in specific areas.
With the cooperation of the banks, the Board judges that moral suasion has gradually become effective. The banking sector has modified their home mortgage policy in terms of loan-to-value ratios, mortgage rates, and grace periods. The CBC will closely monitor further developments in the housing market and take appropriate action in a timely manner.
V. Before the US subprime debacle triggered the global financial crisis, most central banks focused mainly on price stability as the key to economic and financial stability. Nevertheless, they have recognized that economic and financial stability cannot rely solely on stable prices. Meanwhile, effective financial regulation requires a macroprudential policy, in addition to a micropurdential one. It is thus imperative for a central bank to pursue both price and financial stability.
International institutions, including the IMF and the BIS, have recognized a central bank's responsibility in financial stability. To that end, credit growth and asset price movements cannot be ignored when a central bank formulates its monetary policy.
The Board notes that price stability has always been a key mandate of the CBC. Indeed, the Central Bank of the Republic of China (Taiwan) Act also stipulates financial stability as an important objective of the CBC, predating the current global trend.
VI. 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.
VII. Frequent movements of short-term capital are likely to exacerbate volatility in economic cycles and undermine financial stability. The CBC will monitor cross-border capital flows closely and urge foreign investors to deploy their funds in a manner consistent with their declaration statements.