Taiwan food prices likely to trend higher, inflation to recover in H2

Lower oil prices remain the dominant drag on Taiwan CPI, subtracting 0.92pp from the headline rate. The larger drag in July reflected the changes in retail pump prices. Indeed, prices of RON95 fell 2.7% m/m in July. 

The shock to food prices on the back of excess rainfall last month also eased, with food inflation adding 0.46pp to headline. Among the food categories, egg prices were up 3.3% m/m, offsetting lower prices for vegetables (-4.9% m/m) and fruits (-2.7% m/m) due to oversupply. Separately, entertainment added 0.05pp due to price increases by tour operators during the peak summer season. 

"All said, inflation is expected to recover gradually in H2, helped by a low base in Q4. Food prices are also likely to trend higher due to warmer and drier weather from the El Nino episode, as well as the upcoming typhoon season", says Barclays. 

As such, soft CPI should not be of any concern to CBC, given it is mainly supply-side driven and we maintain our call for the CBC to stay on hold at its September meeting. If anything, the markedly weaker-than-expected Q2 GDP print will likely alter the CBC's stance on its liquidity management, which was TWD25.2bn/day in June, lower than the average of TWD34.9bn between January and May. 

As a signal that it is doing more to support growth, the CBC could maintain excess liquidity in the economy at a slightly higher range in the coming months. Beyond that, the CBC will defer to the government stimulus program that was announced on 27 July.

"However, 2015 growth is forecasted to 2.0% due to the much weaker Q2 outturn. Rate normalisation forecast is also pushed back by two quarters and now expect the CBC's first rate hike of 12.5bp in June 2016", added Barclays.