Taiwan central bank likely to ease policy as inflation maintains weakness

The Central Bank of the Republic of China (Taiwan) is expected to cut rates at its monetary policy meeting, scheduled to take place this Thursday as weakening inflation, coupled with a deteriorating labor market has kept the economy under pressure.

The CBC is expected to bring down the benchmark discount rate to 1.375 percent from 1.50 percent. Consumer price index-led inflation fell 1.2 percent in May, significantly down from the peak achieved in February at 2.4 percent.

Furthermore, the unemployment rate crept higher over the last two months, hitting the 4 percent mark. Against the backdrop of weak growth, easing inflation and a deteriorating labor market, it looks clear that the CBC is facing the pressure to loosen monetary policy, DBS reported.

Meanwhile, Brexit remains a fresh risk to the monetary policy of the economy. However, the direct impact is almost negligible as the United Kingdom accounts for merely 1 percent in its total exports and imports. Also, given that Taiwan’s international liquidity position is strong, the TWD assets are not viewed as high-risk assets that are susceptible to external shocks and foreign capital outflows.

However, the indirect impact of Brexit on the Taiwanese economy cannot be neglected. A prolonged period of global market volatility could hurt business sentiment and derail the recovery in the global real economy, which certainly bodes ill for Taiwan’s exports sector.

"Furthermore, whether Brexit will trigger the exit of other EU members and cause the domino effect will also be the risks to watch out for. The CBC is likely to consider the rise in external uncertainties during this week’s policy decisions," DBS commented in its report.