The Central Bank of the Republic of China (Taiwan) increased its main policy rate by 12.5 basis points from 1.875 percent to 2.00 percent at its quarterly policy meeting today, contrary to the consensus forecast for no change. This is the first increase in the rate in twelve months and takes the rate to its highest level since 2008.

In the statement accompanying today's decision, officials expressed confidence that external demand will continue to improve in coming months, with domestic consumption and investment also expected to support stronger headline GDP growth. This positive assessment of the growth outlook has reinforced officials' focus on the inflation outlook. Although they expect inflation will trend lower this year, they expressed concerns that price pressures have remained too strong and that a proposed increase in domestic electricity prices next month could boost inflation expectations. Reflecting these concerns, officials concluded that an increase in the policy rate is required.

Data released since the CBC's previous policy meeting in December have shown volatility in headline inflation, largely reflecting the impact of the timing of lunar new year holidays. Although PMI surveys have shown ongoing contraction in the manufacturing sector, GDP growth strengthened in the three months to December, partly reflecting an improvement in external demand.

At its quarterly monetary policy meeting, Taiwan's central bank is expected to hold its key interest rate at 1.875 percent as inflation accelerated to a 19-month high of 3.08 percent in February from a six-month low of 1.79 percent in January, partly due to the timing of lunar new year holidays. In June last year, the bank maintained its policy rate for the first time in more than a year after raising it for the fifth straight time in March 2023.

Taiwan’s central bank, the Central Bank of the Republic of China, announces its monetary policy with regard to interest rates four times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the discount rate.

The Central Bank of the Republic of China determines interest rate policy at four quarterly meetings during the year, with officials adjusting their main policy rate, the discount rate. A post-meeting statement is issued after each meeting, while the minutes of each meeting are published a few weeks later.

Monetary policy goals are to aid and abet solid economic growth along with rising living standards, and to keep inflation low, stable, and predictable. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.