Taiwan’s Monetary Policy Tightened Further
December 30, 2010
The Central Bank of the Republic of China implemented a third set of interest rate increases, each amounting to 12.5 basis points. The prior two increases were announced June 8 and September 30th. The new discount rate is 1.625% versus a cyclical low of 1.25% prior to June. The collateralized lending rate is now 2.0%, up from a low of 1.625%, and the unsecured loan rate will be 3.875% compared to 3.5% before officials began normalizing rates.
When recession previously struck Taiwan, the central bank slashed its discount rate seven times from a cyclical peak of 3.625% prior to September 26, 2008 to 1.25% after February 18, 2009. The bulk of that decline was administered in back to back doses of 75 basis points on 12/12/08 and 50 bps four weeks later.
Several other tightening moves were also announced today. Reserve ratios on NTD passbook deposits owned by foreigners were raised to 90%. The LTV ratio for mortgages on second homes was lowered to 60% from 70%. Those constraints on mortgage lending will henceforth be applied to three additional areas near Taipei. An M2 growth target of 2.5-6.5% was set for 2011.
Today’s actions should be viewed in the context of a policy normalization process that is not finished. More rate increases lie ahead. A fresh statement from Taiwanese monetary officials released today enumerates several points supporting these rate increases.
- Activity in Taiwan has picked up, led by exports and investment but also including retail and wholesale sales.
- This improvement has spilled over into Taiwan’s labor market.
- Real GDP is expected to have expanded 10% in 2010 and projected to reach 4.5% next year.
- CPI inflation is now at 1.5% but likely to increase in 2011.
- Property price inflation remains high and persistent.
- Market interest rates have been rising gradually.
- Officials see a need to discourage bank credit-funded property market speculation.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
Tags: Taiwan
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