Taiwan inflation figures bottom out

Consumer prices growth has maintained a positive reading for two consecutive months. It registered 0.3% (YoY) in Sep-Oct15, notably higher than the average of -0.6% during the first eight months of this year. Food prices, which had surged in the summer season due to the supply disruptions caused by typhoons, have stopped rising but remained at high levels. Meanwhile, fuel prices and transportation fees have started to decline at a slower rate, in line with the trend in global oil prices. 

CPI growth is expected to stay in the positive territory in the remainder of this year and in 2016. The price decline in the energy-related items will narrow more significantly on the YoY basis from 4Q15 onwards, taking into account a low base effect. Meanwhile, the TWD has reversed its strength and stayed on a depreciation path since 3Q15, thanks to a strong US dollar, RMB devaluation and broad-based weakness in emerging market currencies. TWD depreciation should help mitigate the deflation pressures stemming from weak global commodity prices. 

Domestically, bias is still for retailers and downstream producers to cut prices to boost the sales volumes in the near term, in face of slowing employment / wage growth and weakening consumer demand. With the growth cycle already showing some signs of bottoming, however, the downward price pressures in the domestic sector will be limited and short-lived. There is no change in the view that the central bank will hold rates steady at December's policy meeting.