Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: June 30, 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 1.875%, 2.25%, and 4.125%, respectively, effective from July 1, 2011.
II. The decision is based on the following considerations:
1. Underpinned by strong performance from emerging economies, the global economy has sustained growth in spite of a moderating pace of economic recovery in advanced countries. However, slower-than-expected recovery in the US, the protracted European sovereign debt crisis, and supply chain disruptions associated with the March 11 Japan earthquake are among the uncertainties. In addition, global inflation risks are still high as international raw material prices hover at relatively high levels despite recent corrections.
2. In the domestic scene, Taiwan's economy expanded 6.55% in the first quarter of this year. Employment improved on increased corporate hires. Exports have kept trending up, but export growth rate in New Taiwan Dollar (NTD) terms turned negative in May, threatening to sap the momentum for economic growth. Owing to sluggish growth in the world economy and a higher base effect, domestic economic activity is likely to clamber. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) projected the economy to grow by 4.58% in the second half of the year, slightly lower than the 5.57% forecast for the first half of 2011. For the entire year, the DGBAS predicted Taiwan's economy to post steady growth of 5.06%.
3. This year has seen elevated prices of international raw materials, but imported inflationary pressures were partially offset by the NTD appreciation. As a result, CPI inflation in Taiwan averaged a mild 1.36% annual rate for the first five months of the year. However, for the rest of the year, price hikes of imported raw materials are expected to add to more pressures. In addition, last year's prices of vegetables and fruits were little affected by typhoon damage, resulting in a lower base effect. The DGBAS forecast Taiwan's CPI growth rate to climb to 2.83% in the second half of 2011 and will average at 2.10% for the year as a whole.
4. Bank credit has exhibited stable growth as the domestic economy recovered. The overnight call-loan rates continued to rise following four policy rate increases. To step up the efforts of mopping up mid- and long- term excess liquidity, the CBC has carried on with the issuance of long-term NCDs, bringing down banks' net excess reserves to the level of NT$10.1 billion in May. Meanwhile, monetary growth has been under adequate management, as the M2 annual growth rate averaged 5.94% for the first five months of the year. The level is still within the 2011 target range (2.5%-6.5%), deemed conducive to price stability.
Overall, inflation risks to the global economy remain elevated, along with possible increases in domestic prices in the second half of the year. Market interest rates have also moved up in recent months. Against this background, the Board judges that a rate increase can help contain inflation expectations. The CBC will continue to monitor macroeconomic and financial conditions at home and abroad, and act as needed in order to ensure price and financial stability.
III. Since October 2009, the CBC and the Financial Supervisory Commission have introduced several measures to keep in check real-estate lending risks in financial institutions. Furthermore, the Ministry of Finance has recently enacted the Specifically Selected Goods and Services Tax Act. The Board believes these efforts have been effectively implemented to achieve the goals under the government's ''Plan to Enhance the Soundness of the Housing Market.'' The CBC will also continue to enforce the Regulations Governing the Extension of Land Collateralized Loans and Housing Loans in Specific Areas by Financial Institutions, and take action as warranted by the conditions and new developments.
IV. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, when seasonal or irregular factors (such as massive inflows and outflows 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.