Monetary Policy Decisions of the Board Meeting
PRESS RELEASE Release Date: September 20, 2012
Monetary Policy Decisions of the Board Meeting
I. At the meeting today, the Board decided to hold 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.
II. The decision is based on the following considerations:
1. Taiwan's external demand faces headwinds created by its major trading partners as the Chinese economy slows down, the US growth loses momentum and the eurozone struggles with a recession. The global economy remains susceptible to downside risks.
International crude oil and grains prices stay elevated. Meanwhile, the open-ended bond-buying program recently unveiled by the US Federal Reserve might push up global inflation expectations and attract short-term capital inflows to emerging Asia. Such upsurges could be detrimental to price and financial stability and they deserve careful attention.
2. Due to weaker external demand, export growth continues to contract and weigh on private investment and consumers have also turned cautious, though the outlook will improve slightly in the second half of the year. The Directorate-General of Budget, Accounting, and Statistics (DGBAS) forecast in August that the annual GDP growth rate would rebound to 1.99% in the third quarter and further strengthen to 4.23% in the fourth quarter. Although unemployment rate rose modestly owing to seasonal factors, there has been a further increase in the number of persons employed.
3. CPI inflation averaged 2.94% in the months of July and August when typhoons and torrential rain drove up vegetables prices. Inflationary pressures climbed on account of weather-related price disruptions and a lower base effect, as well as higher international oil and commodities prices. According to the August DGBAS projections, the CPI will increase 2.32% year on year in the fourth quarter and 1.93% for the entire year.
4. In view of the continuing economic slowdown, the CBC has conducted open market operations to manage liquidity levels. As a result, the overnight interbank rate gradually declined and remained broadly stable. For the first eight months of the year, bank loans and investments grew at an annual average rate of 5.11%, and the M2 annual growth rate averaged 4.50%, sufficient to fully meet the needs of domestic economic activity and support growth.
Overall, the international economic uncertainties have yet to recede. At the same time, the domestic economy faces growing inflationary pressures, possibly to be further fueled by steeper inflation expectations driven by short-term capital inflows following the US Fed's third round of quantitative easing. Against this backdrop, the Board judges that a rate hold is consistent with the CBC's mandated objectives to maintain price and financial stability. Looking ahead, the CBC will continue to closely monitor new developments in the global and domestic economic and financial conditions, and undertake appropriate monetary policy actions in a timely manner as warranted.
III. The NT dollar exchange rate is in principle determined by market forces. Nevertheless, when seasonal or irregular factors (such as massive inflows or 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.