Taiwan central bank likely remain on hold to gauge impact of Fed’s hawkish policy stance

The central bank of the Republic of China (Taiwan) (CBC) is expected to keep its interest rate unchanged at the monetary policy meeting scheduled to be held on December 22, in a likely attempt to gauge the hawkish policy stance impact of the Federal Reserve’s monetary policy decision last week.

The island’s consumer price index-led inflation accelerated further to 1.97 percent y/y on surging vegetable and fruit prices in November, up from 1.70 percent the prior month. In addition, the auction yield on the 364-day NCD has climbed gradually since August before soaring in December on concerns over potential rises in TWD funding costs prior to December FOMC meeting.

Foreign investors pulled total USD 2.94 billion out of Taiwan’s equity markets in the period from Donald Trump’s victory on November 9 to December 5 amid surging U.S. inflation expectations stemming from Trump’s pro-growth stance.

In the meantime, massive equity outflows weakened the TWD that has been running a tight correlation with local shares since early 20 15. Year-to-date, global funds have added to their holdings in local stocks by USD 11.41 billion, according to Bloomberg data.

"In the months ahead, the TWD will trade in response to the Fed’s tightening pace, Trump’s protectionist trade policies, potential spillovers of the yuan depreciation and future developments in cross-strait relations. Also, we expect the headline retail inflation to rise above 2.0 percent in December," Scotiabank commented in its latest research report.