Taiwan’s central bank holds policy rate steady following stabilization in economic cycle

The Central Bank of the Republic of China (Taiwan) (CBC) maintained status quo at its monetary policy meeting held Thursday, delivering the first pause after a continuous easing cycle that started in September last year, mainly referring to the recent improvement in export orders as well as overseas exports.

The CBC held the discount rate steady at 1.375 percent yesterday; following yesterday’s policy announcement, some have reached the conclusion that the easing cycle is over and the next step is for the CBC to tighten. However, expectations for an immediate tightening is very premature, DBS reported.

Further, growth momentum may slow notably in the first half of 2017, after a temporary pickup in 2H16, based on the past patterns in the electronics cycle. That the official forecast is for GDP growth to rise 1.88 percent in 2017, still lower than the average of 2 percent in the recent five years.

However, with real interest rates remaining in the positive territory, there is actually some space for the CBC to continue to ease next year, if needed. From another perspective, the low inflation, in combination with subdued credit growth and stable property prices, also mean that there is little reason for the CBC to tighten, the report added.

Lastly, even if the Fed resumes rate hikes from the end of this year, the CBC is unlikely to face the pressure to follow. The adverse impact of Fed hikes on capital flows and exchange rates should be moderate for Taiwan, thanks to its strong current account balance and low exposure to external debt. This will allow the CBC to continue to focus on the domestic growth and inflation outlook when setting monetary policy.

"We expect the discount rate to remain flat at 1.375 percent in the rest of this year and in 2017," DBS commented in its research report.