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Monetary Policy Decisions of the Board Meeting

Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: December 30, 2010

Monetary Policy Decisions of the Board Meeting
I. At the meeting today, the Board reached the following decisions:
1. The Board decided to raise the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 12.5 basis points each to 1.625%, 2.000%, and 3.875%, respectively, effective from December 31, 2010.
2. The Board approved amendments to the Regulations Governing the Extension of Housing Loans in Specific Areas by Financial Institutions, promulgated on June 25, 2010. The amended statute, the Regulations Governing the Extension of Land Collateralized Loans and Housing Loans in Specific Areas by Financial Institutions, will take effect from December 31, 2010.
Major amendments include the following: (1) Sanxia, Linkou and Damsui districts will be added to the scope of Specific Areas; (2) the LTV ratio on second housing loans for home purchases in Specific Areas will be lowered from 70% to 60%; (3) land collateralized loans will be subject to a maximum LTV ratio of 65% of the acquisition cost or the valuation price, whichever is lower, where 10% of the approved loan amount shall not be disbursed until the construction commences (Appendix 1).
3. New Taiwan dollar demand deposits placed by overseas Chinese, foreign, and Mainland Area investors will be subject to a 90% reserve requirement ratio on amount exceeding the outstanding balance recorded on December 30, 2010. A 25% reserve requirement will apply to the portion below the December 30, 2010 level. In addition, a zero remuneration rate will be applied to those funds originating from the aforesaid deposits on banks' B reserve accounts held with the CBC (Appendix 2). The effective date is January 1, 2011.
4. The Board decided to set the target zone of M2 growth at 2.5% to 6.5% for 2011, the same as for 2010 (Appendix 3).
II. The decision to raise the interest rates is based on the following:
1. Taiwan's economic activity has picked up as exports and industrial production rose on the back of growing external demand due to the global economic recovery. Wholesale and retail business also continued to improve. Taking into account the higher base effect, the Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecasts a 4.70% annual GDP growth for the fourth quarter this year. The DGBAS also estimates Taiwan's economy to expand by 9.98% for the year of 2010, followed by moderate growth of 4.51% in 2011. Labor market conditions continued to strengthen amid an improvement in economic activity. The unemployment rate dropped to 4.73% in November while wages have begun to register positive growth during the year.
2. For the first eleven months of the year, the average CPI has risen 0.94% from a year earlier. As rising costs of raw material imports have gradually pushed domestic retail prices higher, the DGBAS projects Taiwan's annual CPI inflation rate to edge up to 1.85% next year.
3. Amid the economic recovery, bank credit has exhibited stable growth and the overnight call-loan rate has moved up steadily. Banks' net excess reserves declined to NT$16 billion in November, while the M2 annual growth rate averaged 4.54% for the first eleven months of the year, close to the median of the 2010 target range (2.5%-6.5%).
4. Against the backdrop of steady growth in the domestic economy, a gradual rise in market interest rates, a projected increase in consumer prices, and persistently high asset prices, the Board judges that a rate hike is conducive to price and financial stability. The CBC will continue to adopt appropriate monetary policy in a timely manner based upon economic and financial developments.
III. The amendments to the Regulations Governing the Extension of Land Collateralized Loans and Housing Loans in Specific Areas by Financial Institutions are based on the following considerations:
1. The CBC's policy measures for housing loans in Specific Areas have shown promising results during the third quarter of the year. Nonetheless, burgeoning property transactions since October have led to similar concerns of increased bank lending for home purchases in other regions neighboring the Specific Areas.
2. Since this September, the CBC has used moral suasion and urged banks to rein in risks related to land collateralized loans. However, the management of such risks would be ineffectual if private banks employ a different set of loan standards from those of public banks. The Board believes that promulgation of these regulations will provide uniform guidance for financial institutions' lending standards.
3. With the aforesaid measures, the CBC aims primarily at discouraging property and land speculation fueled by bank credit, while urging financial institutions to enhance risk management associated with credit extension so as to protect depositors' rights and promote financial stability.
4. Looking ahead, the development of a healthy housing market will require concerted policy efforts from various government agencies and institutions under the government's ''Plan to Enhance the Soundness of the Housing Market''.
IV. Pursuant to the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals, the CBC reiterates that foreign investors must deploy their funds in compliance with applicable laws and regulations. The CBC will continue to closely monitor the flow of such funds.
V. A surge of capital inflows into emerging economies has aggravated the exchange rate volatility of many currencies. Taiwan adopts a managed float exchange rate regime, where exchange rate flexibility can mitigate the impacts associated with destabilizing foreign capital movements.

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