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CBC Cuts Discount Interest Rate Again

2011/04/01 | By Philip Liu

Taipei, April 1, 2011 (CENS)--To curb the expectation of inflation and improve the problem of negative interest rate, the board of directors and supervisors of the Central Bank of China (CBC) resolved yesterday (March 31) to raise the policy interest rates by 0.125 of a percentage point.

As a result, the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral have risen to 1.75%, 2.125%, and 4% per annum, respectively.

This is the fourth interest-rate hike by the CBC since last June, raising the discount rate by 0.5 of a percentage point in total. Perng Fai-nan, CBC governor, remarked that interest-rate hike would help dampen expectation for inflation, adding that the CBC would utilize all monetary policy tools at its disposal to maintain price stability. He implied that the CBC would increase the issuance of negotiable certificates of deposits (NCD) to mop up idle fund on the market and control the amount of money in circulation.

Government-owned banks would raise their deposit interest rates soon, at the expected range of 0.03-0.07 of a percentage point, as well as lending rates, a move to be followed by private banks shortly afterwards.

The interest rate hike would increase the interest burden of housing loan borrowers, amounting to NT$1,150 of extra interest payment a month, or NT$13,800 a year, for a loan of NT$5 million. Hsu Chia-hsin, R&D director of H&B Group, a realty broker, however, believes that the interest hike won't trigger a wave of realty sell-off on the market before the mortgage rate reaches 4% per annum.

Perng admitted that the effect of the Japanese massive earthquake on Taiwan's inflation and economy is indeed a factor for the CBC in making monetary policy.

The governor reported that during the one-year period from last April to March this year, the CBC already auctioned NT$1.2 trillion of 364-day NCDs in accumulation, creating an effect tantamount to 4.55 percentage points of increase in required deposit reserves.

He also pointed to marked reduction in hot money, as evidenced by a plunge of NT$30 billion in the outstanding amount of government bonds held by foreigners and net outward remittances of foreign funds in both February and March. The phenomenon has contributed to relative stability of NT dollar's exchange rate, according to him.