A Fourth Discount Rate in Taiwan as Normalization Continues

March 31, 2011

Taiwan’s central bank Policy Board has raised key interest rates by 12.5 basis points just as it did at the end of third and fourth quarters of 2010.  An initial increase was undertaken in early June of last year.  Today’s action leaves the discount rate at 1.75% versus a low of 1.25% before this normalization process began somewhat over nine months ago.  The collateralized lending rate and unsecured lending rates were also bumped up 12.5 basis points to 2.125% and 4.0%.

Officials released a statement that

  1. Projected steady growth ahead with an improving labor market,
  2. Noted some new possible external headwinds against growth, Japan’s earthquake and unrest in North Africa and the Middle East.
  3. Projected a rise of CPI inflation from 1.2% currently to around 2% later this year,
  4. Acknowledged higher market interest rates and heightened inflation expectations,
  5. “Judged that a rate increase can help contain inflation expectations and safeguard price stability,”
  6. and Retained the prerogative to intervene as necessary to counter disorderly movements of the New Taiwan Dollar.

Taiwanese GDP expanded at the sizzling pace of about 10% last year and should rise over 4% in 2011 in spite of the above-mentioned possible external impediments.  The exchange rate climbed to a three-week high against the greenback following the central bank’s announcement. 

Monetary policy remains fairly loose, and normalization will continue.  During the Great Recession, the discount rate was reduced numerous times from a peak of 3.625% prior to September 2008 to a cyclical low of 1.25% by end-February 2009, which was the rate level until early June of 2010.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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