CBC likely to trim policy rate as benign inflation outlook provides scope for further easing

The Central Bank of the Republic of China (Taiwan) (CBC) is expected to trim its key policy rate at the monetary policy meeting scheduled to be held on Sep 29 as benign inflation outlook laid the bedrock for further easing.

Taiwan’s CPI inflation dropped to 0.57 percent y/y in August after accelerating to 1.23 percent the prior month, primarily due to a negative base effect. The headline retail inflation is expected to stay soft in the months ahead before rebounding somewhat in December. In addition, persistently low auction yield on the 364-day NCD may signal the prospect of further rate cuts, Scotiabank reported.

Meanwhile, Taiwan sees some early signs of economic recovery. The island's export orders surged 8.3 percent y/y in August, thanks to booming demand for handsets and other electronic products after falling for 16 straight months. In addition, its industrial production jumped 7.74 percent y/y last month after declining 0.36 percent y/y in July, beating market estimate of a 4.00 percent rise.

"However, we think another rate cut is needed to further shore up the economy and September quarterly MPC meeting is a proper timing," the bank commented in its latest research report.

A survey by National Central University released on Tuesday showed that consumer confidence weakened 0.9 points to 78.66 in September from a month ago. Meanwhile, on the FX side, the TWD has been running a tight correlation with local shares since early 2015 and will remain susceptible to the news headlines on the US presidential debates/election, Fed speeches and US economic data in the weeks ahead.