The banking and financial subindex gained 1.37 percent after the central bank raised key interest rates by an eighth of a percentage point - only a moderate surprise as news on Thursday of government plans to increase water and electricity fees began to increase expectations for a hike.
"The rate hike was unexpected but also a little bit expected," said Michael On, managing director of Beyond Asset Management. "The banking sector is attractive because of merger possibilities, but raising interest rates also help."
Potential take-over targets Chang Hwa Bank and Taiwan Business Bank were the days' two most actively traded shares, with Chang Hwa adding 3.29 percent to T$22 and Taiwan Business Bank up 4.49 percent at T$12.80.
Analysts say higher rates help insurance firms generate better returns on investments and also gives banks room for a bigger spread between deposit and lending rates.
However, steel shares plunged along with their US counterparts on fears that dwindling demand from China would lead to oversupply next year.
China Steel, Taiwan's biggest steelmaker, lost 1.65 percent to close at T$35.80 and was the day's third most active stock, while Chung Hung Steel dropped T$1.10, or 4.87 percent, to close at T$21.50.
The Standard & Poor's index of US steel shares lost 5.66 percent on Thursday after the Wall Street Journal reported Chinese steel demand grew only about five percent a month recently, down from 26 percent per month in 2002, 2003 and early this year.
The over-the-counter market's TAISDAQ index added 1.11 percent to end at 115.75, while January TAIEX futures added 73 points, or 1.19 percent, to close at 6,188.