The Central Bank of the Republic of China surprised financial markets June 24 by announcing it will raise three policy interest rates by 0.125 percentage points, effective immediately. The announcement came after the CBC held its quarterly meeting.
The increase will bring the country’s discount rate, rate on accommodations with collateral and rate on accommodations without collateral to 1.375 percent, 1.75 percent and 3.625 percent, respectively.
This marks the first interest hike since the CBC upped its key rates by 0.125 percentage points in June 2008. Starting in September 2008, the CBC lowered its discount rate seven times in a row, by a total of 2.375 percentage points. Since the first quarter of 2009, the discount rate has stood unchanged at 1.25 percent.
The continuously improving global economy is bolstering Taiwan’s exports, capital expenditure and private consumption, the CBC noted in a statement explaining its reasons for the rate increase. Rising raw material prices on the global front are also driving up Taiwan’s consumer prices, the bank added.
“Against a backdrop of economic recovery both at home and abroad, the CBC has gradually removed its quantitative easing policy since the second half of 2009,” according to the CBC. The central bank noted it has issued certificates of deposits totaling NT$300 billion (US$9.3 billion) since April to “mop up excess liquidity.”
“The government is projecting a consumer price increase of 1.4 percent for 2010. We hope to bring the number below that level,” said CBC Gov. Perng Fai-nan at a news conference June 24. “The rate change represents a very mild adjustment to the state’s monetary policy,” he added.
In response to concerns that the rising yuan may affect the exchange rate of the New Taiwan dollar and induce currency speculation, Perng said the NT dollar exchange rate is not pegged to any foreign currency but is determined by market supply and demand. “The rate increase will not attract additional international 'hot money' into the island, and the CBC will continue to keep a close eye on such fund flows,” he stressed.
Besides raising key interest rates, the CBC simultaneously unveiled its Regulations Governing the Extension of Housing Loans in Specific Areas by Financial Institutions, which will also take effect June 25. The regulations, designed to cool down the local real estate market, set a lower loan-to-value ratio and impose stricter terms on new mortgage loans in specific areas.
According to the CBC, recently a large portion of new mortgage loans has concentrated in Taipei City and 10 specific cities in Taipei County. “The concentration of lending may undermine the effectiveness of risk management of banks,” the statement pointed out.
While the CBC has actively urged banks to practice prudent lending and monitor asset portfolios since October 2009, “the Board judges that it is necessary to take moral suasion one step further and put in place concrete and explicit regulations.” However, the regulations are aimed mainly at high-risk real estate lending and will not affect most borrowers, Perng stressed. (HZW)
Write to Meg Chant at meg.chang@mail.gio.gov.tw