The Central Bank of the Republic of China (CBC) decided during its quarterly board meeting that it will keep interest rates unchanged for now.

“Interest rates will stay where they are because consumer prices are still falling,” said CBC Gov. Perng Fai-nan during a press conference after the announcement was made Dec. 24.

Between September 2008 and February 2009, the central bank reduced key rates seven times by a total of 2.375 percentage points. Rates have been kept stable at historic lows for four straight times by the board since March this year.

The benchmark discount rate—the rate charged on loans to commercial banks—will remain at 1.25 percent. The interest rate for accommodations with collateral will stay at 1.625 percent, while that for accommodations without collateral will also remain unchanged at 3.5 percent.

The latest decision came amid an economic rebound on the island. “The gradual pace of recovery and the absence of inflationary pressure warrant a continuation of the current policy stance,” the central bank stated. “An appropriately easy monetary policy will help maintain the smooth operation of economic activity.”

The global economy is recovering gradually and international financial markets are stabilizing, the central bank said.

Against the backdrop of a recovering global economy, Taiwan’s domestic economic activity has steadily picked up. Nevertheless, “as actual output remains significantly lower than potential output, economic growth momentum has room for further increase.”

Compared with the same period last year, the prices of crude oil and consumer durables have declined. For the first 11 months of this year, Taiwan’s Consumer Price Index and core prices were 0.92 percent and 0.08 percent lower, respectively, compared with the same period last year.

The Directorate-General of Budget, Accounting and Statistics under the Cabinet forecast a stable CPI growth of 0.92 percent in 2010.

Bank credit growth in the first 11 months of 2009 rose 0.56 percent from the corresponding period last year. The rise stands at 0.87 percent when direct financing is taken into account. These readings surpassed the DGBAS forecast of a 2.53-percent contraction of the island’s economy in 2009.

“With long-term and short-term interest rates remaining at low levels, lower funding costs for enterprises and individuals could help boost investment and consumption,” the central bank said.

Separately, the central bank set its money supply increase target zone for 2010 at between 2.5 percent and 6.5 percent, the same goal it set for 2009.

“This decision takes into account the economic growth and inflation outlook for the coming year, the effects of changes in interest rates and other factors on the demand for money, and opinions of scholars and experts,” the CBC explained.

The average growth rate for M2—the broadest measure for money supply—in the first 11 months of 2009 reached 7.32 percent, exceeding the upper limit of the CBC’s target zone for the year in the wake of heavy trading in the domestic stock markets, foreign capital inflows and a low comparison basis.

Another major reason why the M2 figures surpassed their original target has been the easy funding environment created to shore up economic growth while incurring no inflationary pressure amid the global financial crisis.

After taking into account the DGBAS’s forecast on the economy and inflation, the M2 target zone for this year has been revised upwards to between 3.5 percent and 7.5 percent.

“The CBC will monitor asset price movements closely, as it continues adopting appropriate monetary policy in a timely manner in response to the evolving economic and financial conditions both at home and abroad.”

The recent global financial crisis has highlighted the important role played by asset prices, it said.

The CBC indicated that recent increases in property prices have not escaped its notice. The central bank noted, however, that the cost of housing has not increased uniformly throughout the island. “Property price hikes have been witnessed mainly in Taipei City, Taipei County, Taichung City and Kaohsiung City, while some other areas have experienced a downturn,” the governor said.

“Surges in real estate prices have been partial rather than islandwide.” Consequently, it would not be appropriate to put into practice “blunt instruments.”

Some commercial banks have already adopted cautious measures such as selective credit controls when they consider mortgages to borrowers who purchase houses for the purpose of investment rather than residence. “We will continue monitoring the property market closely,” Perng added.

Write to Adela Lin at adela2009@mail.gio.gov.tw

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