Monetary conditions continue to ease in Taiwan

In mid-December, the central bank's policymakers decided unanimously to reduce the benchmark interest rate by 12.5 basis points to 1.625%. The previous rate cut of the same magnitude took place in September. The decision reflects the fact that both global and domestic economic growth has fallen short of expectations; the central bank notes that Taiwan's negative output gap has widened and inflation expectations are mild. 

Indeed, real GDP contracted by 0.6% y/y in the third quarter, with output expansion estimated to have reached around 1% in 2015 as a whole. Economic growth is expected to pick up modestly over the coming quarters, averaging 2% y/y in 2016. Consumer price inflation remains low at 0.5% y/y in November; nevertheless, price pressures have intensified slightly over the past few months, with inflation returning to positive territory in September after eight months of deflation. 

"We expect inflation to accelerate further over the coming months, it will likely hover only slightly above 1% y/y for most of 2016. While the New Taiwan dollar is in principle determined by market forces, Taiwanese monetary authorities are prepared to intervene if they believe that the currency market is unduly disrupted by seasonal or irregular factors, such as sizable inflows or outflows of short-term capital", says Scotiabank.