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Central Bank of the Republic of China

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Monetary Policy Decisions of the Board Meeting

Central Bank of the Republic of China (Taiwan)
PRESS RELEASE Release Date: June 21, 2012

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 adopt targeted prudential measures with respect to high-value housing loans, effective from June 22, 2012. Housing loans for properties located in Taipei City or New Taipei City with the appraisal or sale value of NT$80 million or above, or those located elsewhere in Taiwan with the appraisal or sale value of NT$50 million or above shall be subject to a loan-to-value ratio capped at 60% with no grace period (See Appendix).
II. The decision to keep the policy rates unchanged is mainly based on the following considerations:
1. Several international organizations have revised down their forecasts for the global economic outlook. The adjustment largely reflected the moderate US economic expansion, a slowing Chinese growth, unstable international financial markets, and a stagnant European economy. Downside risks of global economic outlook remain high.
In addition, demand for oil softened on the weak global economy, while supply appeared sufficient as new technology boosted oil reserves of the US and the oil-producing countries also increased output. Meanwhile, the Middle East geopolitical tension has eased and speculative activity subsided. These factors combined to push down international crude oil and raw material prices, relieving inflationary pressures globally.
2. Taiwan's exports have posted negative growth for three months in a row due to weak external demand, contracting by 5.0% for the first five months of the year. Taiwan was hit harder compared with other major Asian counterparts registering positive export growth. As a result, industrial production continued to decline, weighing on private investment. Private consumption also showed lackluster growth as local stock indices headed lower.
Taiwan's economy grew modestly by 0.39% year on year in the first quarter of 2012. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) revised its projection for Taiwan's 2012 economic growth to 3.03% in its end-of-May forecast. In terms of the labor market conditions, employment continued to grow and the unemployment rate kept declining.
3. Domestic inflationary pressures abated partly reflecting a significant decline in international commodity prices and a slowdown in the domestic economy. In addition, the government decided in early May that, instead of initiating a one-off hike in electricity prices, it would execute a smaller rise to be phased in three stages. The DGBAS forecast the 2012 CPI annual growth to increase by 1.84% at the end of May, down from 1.94% a month ago. For the second half of the year, weather-related factors will be the main driver of inflation.
4. The CBC continues to issue certificates of deposit (CDs) to absorb excess liquidity and to keep banks' excess reserves in check. The interbank overnight call loan rate went up from March 26's 0.399% to reach 0.511% on June 20. For the first four months of this year, the average annual growth rate of bank loans and investments was 5.30%, and the M2 annual growth rate was 4.98%, indicating there is sufficient market liquidity to fully meet the needs of domestic economic activity.
Against the backdrop of global economic uncertainties and a domestic economic slowdown, yet with inflation concerns still in sight, the Board judges that a rate hold is consistent with the CBC's mandated objectives to maintain price and financial stability and promote economic growth.
In the future, the CBC will continue to closely monitor the evolution of economic and financial conditions at home and abroad, and undertake appropriate monetary policy actions in a timely manner as warranted.
III. The main reasons behind the decision to adopt targeted prudential measures with respect to high-value housing loans are:
1. Despite the positive results produced by the effective enforcement of the regulations governing land collateralized and housing loans, a recent spike in the loan-to-value ratio for high-value housing loans with below market interest rates has raised concerns about banks' risk management and the adverse implications for the soundness of their operations.
2. In response, the CBC took action in April, using moral suasion and target financial examinations to urge banks to enhance risk management of high-value residential mortgages. While most banks have since shown restrains in this aspect, their standards vary and the Board judges that the introduction of a consistent set of guidelines will further help banks strengthen their risk management.
3. The announcement of the measures should help prevent damaging- competition among banks in the market of high-value housing loans. This is also consistent with the “control over real estate lending risks” highlighted in the government's ''Plan to Enhance the Soundness of the Housing Market''.
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.

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