Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: December 29, 2011

Monetary Policy Decisions of the Board Meeting

I. At the meeting today, the Board reached the following decisions with unanimous approval by the Board members:

1. The Board decided to keep the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral unchanged at 1.875%, 2.25%, and 4.125%, respectively.

2. The Board decided to set the target zone of M2 growth at 2.5% to 6.5% for 2012, the same as for 2011 (Appendix 1).

II. The decisions are based on the following considerations:

1. During the second half of 2011, the impact of the European sovereign debt crisis was no longer confined to the financial sector but also spilled over to the real sector, carrying adverse implications for global economic growth and financial stability. Despite the efforts undertaken by the European Union and the European Central Bank to address the crisis, risk remains for a European recession in 2012. The downside risk to global economy is still high. Under these circumstances, prices of some commodities have fallen in recent months from their previous peaks, while international oil prices stayed high.

2. The slowing global economy has gradually spread its impact to Taiwan. Weaker demand from Taiwan's major trading partners has weighed on export growth and dragged growth in private investment into negative territory. Growth in private consumption was also affected.

The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecast Taiwan's economy to expand 4.51% in 2011 with 3.69% growth in the fourth quarter. For 2012, the DGBAS projected an expansion at 4.19% year on year.

In the labor market, the number of persons employed continued to increase and unemployment rate edged down in November.

3. Domestic inflation was mild as the CPI annual growth rate averaged 1.37% for the first eleven months of the year.

However, close attention should be paid to future price development with emphasis on the following considerations.

(1) For the first eleven months of this year, the prices of vegetables declined in the absence of weather-related damages thanks to relatively temperate weather throughout the year. Meanwhile, fruit prices dropped to low levels in the second half of the year. Both would result in a lower base effect for the year-on-year comparison in 2012.

(2) The NT dollar appreciation has helped significantly to mitigate the pressures of imported inflation. Nonetheless, the difference between the annual growth rate of import prices in NT dollar terms and that in US dollar terms has narrowed down from a peak of 12.68 percentage points in June 2011 to 0.39 percentage points in November. This shows price inflation has become less easy to tame through an NT dollar appreciation. Moreover, the future development of the aforementioned difference remains uncertain.

(3) The annual growth rate of import prices in US dollar terms reached 9.75% in November, considerably higher than the annual CPI growth rate at 1.01% of the same month. Imported inflationary pressures remained.

(4) Most international institutions are projecting high oil prices in 2012 for the following reasons:

a. Demand from emerging market economies for crude oil will continue to increase, and the US economy is expected to expand moderately on stimulus measures. These developments are likely to push up oil prices.

b. Geopolitical risk in the Middle East, such as that associated with Iran, may disrupt oil supply.

4. The banking sector in Taiwan enjoys ample liquidity and steady credit growth without experiencing the credit squeeze affecting Europe and the US. For the first eleven months of the year, the average annual growth rate of bank loans and investments was 7.59%, and the M2 annual growth rate averaged 5.86%, both higher than the projected 4.51% GDP growth this year. This indicates sufficient market liquidity to fully meet the needs of economic activity.
In the context of high excess savings and stable domestic inflation, both long- and short-term interest rates are at low levels.

Overall, Taiwan's economy continues to register stable growth amid global economic uncertainties, while the 2012 price development still requires close monitoring. With interest rates at low levels, the Board judges that the current policy stance is conducive to economic and financial stability and will support economic growth in Taiwan.

III. Taiwan adopts a managed float regime, and 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 (either appreciation or depreciation) 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.

IV. In view of the international and domestic challenges stemming from the current economic and financial situation, particularly the impact of the European sovereign debt crisis, the government has been dedicated to laying out response measures to promote economic growth. Looking ahead, the CBC will continue to closely monitor economic and financial conditions at home and abroad, and adopt appropriate monetary policy in a timely manner as warranted.

Appendix 1

Explanatory notes on M2 growth target zone for the year 2012

1. For the first eleven months of 2011, the annual growth rate of M2 averaged 5.86%, within the target range (2.5%-6.5%), thanks to steady economic expansion and continued bank credit growth.

2. By incorporating the DGBAS' latest projections of economic growth and CPI inflation for 2012 into simulation, the CBC estimates the annual increase in the demand for M2 will be 4.65% in 2012. Using 0.5 percentage point increments and rounding off to 4.5% with a bound of ±2 percentage points to account for the uncertainty factor and error estimates, the M2 growth target zone for 2012 is set at 2.5% to 6.5%, the same as this year.