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.



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