The Central Bank of the Republic of China (Taiwan) (CBC) is expected to hold the benchmark discount rate at 1.375 percent at its monetary policy meeting, scheduled to be held on March 23 and maintain the view that economic recovery is moderate and inflation risk is under control, DBS Group Research reported.

The ongoing recovery is not strong enough to prompt the CBC to hike rates. Exports have surged to double digit growth in January-February this year. But consumption remained lacklustre and wage growth hasn’t picked up. Policymakers would like to see a broad-based and self-sustained recovery before contemplating rate hikes, DBS Research reported.  

Inflation is not a threat during the current phase of economic cycle. Consumer price index (CPI) rose 1.1 percent in Jan-Feb, a slower rate than 1.8 percent in 4Q16. Food prices have receded thanks to the fade of supply-side disruptions. The recent correction in global oil prices has also reduced the risk of energy inflation.

Admittedly, public inflation expectations have increased, due to the government’s implementation of the new workweek rules and the resultant boosting impact on overtime pays. This may not be a big concern to policymakers for now. The official estimate is for the new workweek rules to boost CPI inflation by a mild 0.3ppt in 2017.

"The strength in the TWD should also dissuade the CBC from hiking rates," the report said.

Year to date, the TWD has appreciated 5 percent against the greenback, 3 percent versus the EUR, 2 percent versus the JPY and 5 percent against the CNY.  

On the NEER basis, the TWD has risen to the highest level over 15 years. From this perspective, the CBC should also adopt a cautious approach on interest rate policy, in order to avoid fuelling short-term capital inflows and inducing further appreciation pressures on the TWD.