The market rates are falling in Taiwan, reflecting the ripple effects of Bank of Japan's negative rates policy. The overnight TWD interbank rate, which stayed stable at 0.23% before the Bank of Japan's (BOJ) policy announcement on 29 Jan, has dropped to 0.20% starting 30 Jan. With the 5Y and 10Y yields both reaching new record lows this week, government bond yields also declined across the curve.

Taiwan's central bank (CBC) had guided the overnight rate down by 6-7bps in Aug15 after China's devaluation of the RMB. This was followed by a 12.5bps reduction in the benchmark discount rate a month later in Sep15. The renewed decline in overnight rate has boosted market expectations for another rate cut from the CBC. Appreciation of the TWD versus the JPY and a loss in trade competitiveness are cited as the reasons for the CBC to move. 

The impact of exchange rates might be overstated, a rate cut is likely because of the weak macro outlook. Given the sluggishness in global trade and the lack of potent policies to support domestic demand, the GDP growth (YoY) is expected to remain negative in 1Q16. Deflation risks are on the rise, in light of a wide output gap and subdued oil prices. 

"We expect the government to revise down the 2016 growth and inflation forecasts during the upcoming review on 19 Feb. Accordingly, we also expect the central bank to cut rates by 12.5bps at the next meeting in March, which will take the benchmark discount rate to 1.50% from 1.625%", notes DBS Group Research.