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(Edited to properly credit DBS Bank Group Research)
On Thursday, Taiwan’s central bank, CBC, will review its monetary policy, where it is likely to lower its rates by 12.5bps, the third such move since September 2015, according to DBS Bank Group Research (DBS) notes.
In order to give additional support to the economic growth, a further rate reduction is required. For the first two months of 2016, Taiwan’s exports continued to shrink noticeably, weighing on capital investment and industrial production. Certain domestic indicators such as consumer confidence, retail sales and consumer loans have indicated signs of a recovery with the help of monetary and fiscal stimulus measures implemented since H2 2015.
However, the moderate growth in domestic demand does not seem enough to counter the decline in exports, further commented DBS. "We reckon that GDP growth in Q1 is expected to remain in negative territory at -0.6% (YoY)." Meanwhile, in the financial markets, capital outflows have reduced and inflows have returned with the help of receding expectations for Fed rate hikes and stabilizing RMB.
The Taiwanese dollar has totally regained its loss that was incurred during the global market turbulence at the beginning of 2016 and has strengthened 1.5% against the US dollar year to date. In the current context, capital outflows are not much of a worry. Focus is shifting to the increase in inflows. The CBC governor, during a parliamentary hearing in March, said that cutting rates might help reducing hot money inflows.
DBS noted that there are market expectations that the central bank might even speed up the pace of easing, lowering rates by a larger 25bps this week. However, this is unlikely to happen. The growth cycle for the short-term is stabilizing and not deteriorating. Capital inflows are moderate and whether the increase will be sustained remains uncertain.
Overall, the CBC is expected to take a cautious approach to further easing. It is likely to lower benchmark discount rate to 1.50% this week and to 1.375% by mid-2016.
