Taiwan keeps discount rate at 1 7/8% with weakening external demand

By Ashley Montgomery

Kansas City, Kan., Sept. 20 - The board of the Central Bank of the Republic of China (Taiwan) unanimously voted to keep the discount rate unchanged at 1 7/8% at its policy meeting on Thursday.

The board also voted to hold the rate on accommodations with collateral and the rate on accommodations without collateral unchanged at 2¼% and 4 1/8%, respectively.

The board said that the decision to hold the rate steady reflects weakening in Taiwan's external demand challenges created by the slowdown in the Chinese economy, loss of growth in the United States and the recession in the euro zone.

However, the board expects a slightly better outlook in the second half of the year, with the GDP growth rate expected to rebound and strengthen to 4.23% by the end of the fourth quarter.

The bank reported that typhoons and torrential rain drove up vegetable prices, causing inflationary pressures to climb. For the entire year, the CPI is projected to increase by 1.93%.

The bank said the overnight interbank rate gradually declined and remained broadly stable. For the first eight months of this year, the average annual growth rate of bank loans and investments was 5.11%, and the M2 annual growth rate was 4.5%.

Domestically, industrial production continued to decline, weighing on private investment. The economy grew modestly by 0.39% year-on-year in the first quarter of 2012. The Directorate-General of Budget, Accounting and Statistics revised its projection for Taiwan's 2012 economic growth to 3.03% in its end-of-May forecast.

Overall, the board said the economy continues to face inflationary pressures, which may be worsened by the U.S. Federal Reserve's third round of quantitative easing. For this reason, the board said that a rate hold is consistent with its mandated obligations to maintain price and financial stability.

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