Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: March 31, 2011
Monetary Policy Decisions of the Board Meeting
I. At the meeting today, the Board reached the following decision:
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 1.750%, 2.125%, and 4.000%, respectively, effective from April 1, 2011.
II. The decision is based on the following considerations:
1. The year 2011 unfolded with better-than-expected economic performance from major advanced countries and continued growth in emerging economies. However, instability in both North Africa and the Middle East has pushed up international commodity prices and added to inflationary pressures. In addition, the recent Japanese earthquake created more uncertainties for industries, such as supply chain interruptions for raw material supplies and key parts. The above factors could pose downside risks to the global recovery.
2. Taiwan's economy was on a steady path of expansion. Bolstered by export growth, industrial production rose; private consumption remained on an uptrend. The labor market continued to show improvement with a decline in unemployment rate. Though the Directorate-General of Budget, Accounting, and Statistics (DGBAS) projects a 4.92% annual GDP growth for Taiwan this year, the forecast is shadowed by potential setbacks related to effects of the March 11 Japanese Earthquake on Taiwan's exports and industries.
3. For the first two months of 2011, the CPI growth rate averaged 1.21%, reflecting price increases in domestic retail goods as a result of rising costs of raw material imports. According to the DGBAS, Taiwan's annual CPI inflation rate is likely to climb to 2.00% this year.
4. The domestic economic recovery also helped bank credit to grow steadily, and the overnight call-loan rate has moved up steadily. Banks' net excess reserves had gradually decreased to reach an appropriate level at NT$19.1 billion in February as the Bank absorbed more excess liquidity with three policy rate rises since last June and the increased issuing of long-term NCDs (where the issuance between last April and this March amounted to NT$1.2 trillion, with an equivalent effect of raising the reserve requirement by 4.55 percentage points). Meanwhile, the Bank has also managed monetary growth well. For the first two months of this year, the M2 annual growth rate averaged 5.86%, still within the 2011 target range (2.5%-6.5%). These measures are deemed to be conducive to price stability.
More uncertainties on the international front could adversely affect the steady and robust growth of Taiwan's economy. Nonetheless, market interest rates moved up gradually and imported inflationary pressures also heightened. Against this backdrop, the Board judges that a rate increase can help contain inflation expectations and safeguard price stability.
The CBC will continue to closely monitor macroeconomic and financial conditions at home and abroad and apply appropriate policy tools in a timely manner so as to achieve the operational goals of price and financial stability vested with the Bank.
III. It is found that the concentration in bank lending has continued to improve since mid-2010. For instance, the ratio of housing loans to all outstanding loans has fallen to 27.17% at the end of February from the 27.97% recorded in June 2010. The ratio of newly-extended loans for housing in ''Specific Areas''* to total outstanding new housing loans also went down from 64.4% to 59.9%. With lower loan-to-value ratios and higher lending interest rates, banks are better off in terms of risk control and sound management, both of which will better protect depositors' rights and promote financial stability.
The Board believes that the targeted prudential measures introduced since October 2009 have been actively and effectively implemented under the government's ''Plan to Enhance the Soundness of the Housing Market'' with an aim to urging financial institutions to enhance risk control associated with real estate lending.
Looking forward, the Bank will continue to enforce the Regulations Governing the Extension of Land Collateralized Loans and Housing Loans in Specific Areas by Financial Institutions promulgated in the December 30, 2010 Board Meeting, and take appropriate actions as necessary in response to new developments. Meanwhile, the ongoing policy efforts from various government agencies and institutions will also be conducive to the sound development of the real estate market.
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, when seasonal or irregular factors (such as massive flows of short-term capital) lead to excess volatility and disorderly movements in the NT dollar exchange rate with adverse implications for economic and financial stability, the CBC will step in to maintain an orderly market.
* As prescribed in the Regulations Governing the Extension of Land Collateralized Loans and Housing Loans in Specific Areas by Financial Institutions, the scope of ''Specific Areas'' herein include Taipei City and 13 districts in New Taipei City (Xinbei City), covering Banciao, Sanchong, Jhonghe, Yonghe, Sinjhuang, Xindian, Tucheng, Lujhou, Shulin, Sijhih, Sanxia, Linkou, and Damsui.