Taiwan CB likely to ease interest rate, Brexit referendum closely eyed

The central bank of Taiwan (CBC) is expected to ease its monetary policy in its meeting scheduled for June 30. Also, the CBC is closely eyeing the June 23 Brexit referendum, which is likely to create deep craters in the global financial market if "Leave" camp manages to take the United Kingdom out of the EU.

The Central Bank of the Republic of China (Taiwan) is expected to slash repo rate by 12.5 bps at this meeting. The meeting that will be held after the UK referendum, is likely to suffer the negative spillover effects of the turmoil that would hit global trade largely.

The CBC is likely to weigh the repercussions of Brexit on Taiwan’s real economy, considering its heavy reliance on external trade. The pressures of capital outflows and TWD depreciation are expected to be relatively moderate and short-lived, DBS reported.

Further, despite the referendum result, Taiwan’s economy is largely in need of a policy easing, given the continued deterioration in export orders and fall in industrial production during April-May, that suggests that gross domestic product in the second quarter will decline, more than expected. This calls for a rate cut soon, barring decision of the Brexit cause.

"We have revised down the 2016 growth forecast to 0.9 percent from 1.4 percent, and lowered the 2017 forecast to 1.8 percent from 2.0 percent," DBS said in a research report.

Moreover, decline in inflation is another cause for the CB to ease, with headline consumer price index dropping to 1.2 percent y/y in May, down from the peak of 2.4 percent in February. Also, further easing can be expected in September, as well, against the backdrop of extended weakness in economic growth.

Meanwhile the benchmark discount rate is projected to fall to 1.25 percent by the year-end, hitting the historical lows recorded after the global financial crisis in 2009, the report added.