Interest rates unchanged, required reserve ratio raised: Central Bank (update)

Taipei, Sept. 19 (CNA) After wrapping up a quarterly policymaking meeting on Thursday, Taiwan's central bank said it has decided to leave its key interest rates unchanged.

However, the central bank also decided to raise the required reserve ratio -- the proportion of deposits regulators require banks to hold in reserve and not loan -- by 25 basis points to rein in high house prices after a quarter percentage hike in June.

With the local consumer price index (CPI) staying above the 2 percent alert level set by the central bank, the central bank institution did not follow the U.S. Federal Reserve to start a rate cut cycle overnight.

In the first eight months of this year, the CPI rose 2.32 percent from a year earlier after inflation in August hit 2.36 percent largely on higher food prices.

After the decision, the discount rate remains at 2 percent -- which is still the highest in 15 years -- with rate on accommodations with collateral at 2.375 percent and the rate on accommodations without collateral at 4.250 percent.

The decision represents the second consecutive quarter in which the central bank has resolved to maintain its key interest rates.

Analysts had widely anticipated the central bank would raise the required reserve ratio again as the local house market remains hot and mortgage extensions by banks are on the rise. Analysts said a hike in required reserve ratio is expected to be effective in preventing funds from flowing from banks to the housing market.

On the back of the government's latest mortgage program to help young people buy homes by providing subsidies on interest payments, mortgages extended by Taiwanese banks accounted for 37.5 percent of their total lending at the end of August, which has come closer to a historic level of 37.9 percent in 2009.

In addition, the central bank has also lowered the loan-to-value ratio -- the percentage of the value of the house that can be carried in a mortgage -- for individual buyers for their second-home mortgages from 60 percent to 50 percent, applied to the entire country.

This nationwide measure aims to reduce property speculation by forcing buyers to put up more of their own capital to purchase property. Currently, only Taipei, New Taipei, Taoyuan, Taichung, Tainan, Kaohsiung cities and Hsinchu City and County have such controls.

Meanwhile, the loan-to-value ratio for institutional and individual buyers around the country for luxury homes and third-house mortgages has been lowered to 30 percent from 40 percent, while the loan-to-value ratio for property developers who collateralize their unsold homes has been lowered from 40 percent to 30 percent.

In addition, no grace period is allowed for individual buyers who already own a home but will buy their first one, which means they will be required to pay interest and the principals at the same time. Currently, such house buyers are allowed to only pay interest for a period of time agreed upon by banks.

The central bank's measures announced on Thursday are the seventh round of selective credit controls aimed at cooling down the property market.

According to the central bank, the value of luxury homes in Taipei is no less than NT$70 million (US$2.19 million), NT$60 million in New Taipei and NT$40 million for the rest of the country.

Speaking with reporters, Central Bank Governor Yang Chin-long (楊金龍), said the latest selective credit controls will have a major impact on the home market as the effects of the seventh round of measures is almost equal to the combined effect of the previous six rounds.

"It was a difficult decision but the central bank had no choice," Yang said. "Although the bank came under heavy pressure it made its own decision."

With speculation in the home market on the rise, bank loans flocked into the home market, Yang said, adding that since the beginning of this year the central bank has seen many banks extend too many loans to home buyers.

"The concentration of bank loans in the home market is very severe now and even more serious than 2009," Yang said.

Yang said the central bank has learned from the subprime mortgage crisis in the U.S. market from 2007 to 2010, which was triggered by a steep decline in home prices after the burst of a housing bubble, which resulted in a global financial crisis and paved the way for recession.

The banker also cited the economic bubble in Japan from 1985-1995 as a reason for the central bank to do everything it can to prevent a repeat.

"The central bank has sufficient data behind its decision making," Yang said. "The credit controls are the result of careful research by the bank."

The latest credit controls aim to teach market speculators a lesson, "telling them they cannot secure as many loans as they want," Yang said.

Yang emphasized the central bank remains independent in its decision making, denying suggestions that the Presidential Office and the Cabinet have intervened in the bank's decision-making process.

The seventh round of selective credit control is slated to go into effect on Friday, while the hike in the required reserve ratio will become effective on Oct. 1, taking funds back from the market.

In response, Jessica Hsu (徐佳馨), head of property agent H&B Business Group's research division, said the seventh round of selective credit controls is expected to send ripples through the home market in the fourth quarter and push down transaction volume. She added that home prices could also face downward pressure.