Taiwan’s central bank likely to ease monetary policy on weak growth outlook

Weak external demand has been muddling Taiwanese economic rebound, while underlying inflationary pressures continue to be weak. The nation’s central bank is expected to ease its policy again during its June meeting amidst strong headwinds to economic growth, noted Societe Generale in a research report.

The overall economic cycle of Taiwan is strongly connected to its electronic parts and components’ exports. It appears that the recovery in external demand has become less certain given the data on hand. Both electronics exports and orders fell considerably in April. Recovery in May reversed part of the declines just marginally.

The absence of signs of a strong rebound in foreign demand has adversely impacted the Taiwanese economy. Investment confidence has been dull, while growth in earnings has weakened. Moreover, deterioration in the labor market remains as the jobless rate increased gradually.

Excluding inflation, retail sales softened again, falling 0.4 percent year-on-year following a slight increase of 0.5 percent in April. This is worse than the first quarter’s average growth rate of 1.2 percent year-on-year.

Meanwhile, the nation’s headline CPI inflation has normalized. Inflation in May slowed to 1.2 percent year-on-year after the brief fresh food supply shock in spring. Core inflation last month was quite stable at one tick below 1 percent year-on-year. The consumer sentiment index dropped further in May to 79.8 given the labor market development.

Even if commodity prices are expected to rebound moderately in the second half of 2016 and the currency might face downward pressures again, there has been a recovery in food supply. Also, growth in earnings is slowing, while the output gap is widening, according to Societe Generale.

During the second quarter meeting, central bank governor Perng Fai-nan stated that lowering policy rates might aid in averting hot money inflows. Since the last meeting, there has been a modest increase in net equity inflows. In the mean time, the Taiwanese dollar appreciated moderately against the US dollar, while the effective exchange rate remained unchanged.

As the external demand has not recovered strongly and the negative impact on the economy is expected to continue, the Taiwanese central bank is expected to lower rates by 12.5 basis points to hint at its accommodative stance and stimulate confidence, noted Societe Generale.