Central bank of Taiwan likely to leave policy rate unchanged at 1.375 percent on Thursday, says Scotiabank

The Central Bank of the Republic of Taiwan (China) (CBC) is expected to leave its policy rate unchanged at 1.375 percent at its monetary policy meeting, scheduled on Thursday although the Fed is expected to announce the balance-sheet drawdown at the September FOMC meeting this week, given the island’s benign inflation outlook, Scotiabank reported.

Taiwan’s consumer prices are likely to rise at a slower pace in September and then sink into deflationary territory in October and November on account of the basis effect.  The central bank has raised the amount of a single 364-day NCD auction to TWD 170bn starting in May to absorb excess liquidity in the onshore markets that have persistently pulled down the NCD auction yields.

It is entirely consistent with increasing foreign reserves. Foreign investors poured USD 5.58bn and USD 3.44bn into local equity markets respectively in Q1 and Q2 before pulling out USD 982mn so far this quarter. Since the release of the highly-anticipated iPhone X on September 13, there have seen continued equity outflows given the device’s delayed availability that could hurt holiday-quarter sales.

In the months ahead, the TWD is expected to respond to cross-border flows in an asymmetric manner, i.e. more susceptible to equity outflows possibly stemming from concern over the Fed shrinking its balance sheet and/or the ECB tapering its QE program. Meanwhile, the impact of stock inflows on the TWD exchange rate could be relatively contained.

"In addition, the geopolitical situation on the Korean Peninsula and the Catalan independence referendum set for October 1 could swing market sentiment into risk aversion from risk appetite suddenly. We stay with our short TWD/INR cross position for a higher return," the report said.