Taiwan CBC is unlikely to react to the temporary weakness

The Taiwan DGBAS lowered its official forecast for Taiwan's 2015 GDP growth to 3.28% yoy in May. That said, even after downgrading, the estimated 2015 growth rate is still stronger than actual GDP growth in 2012 and 2013, during which period the CBC remained on hold.

It has been reported that CBC reiterated in an email statement that "Korea's yield curve is still higher than Taiwan's", following the Bank of Korea's June rate cut to a record low of 1.5%.

Previously, CBC also said that a weaker TWD could raise costs for Taiwanese importers. These elements taken together suggest that CBC may be less than willing to cut rates or toweaken TWD to boost export competitiveness.

In fact, the ample liquidity conditions onshore have not changed much from one quarter ago. The interbank overnight lending rate has remained largely stable at its level of two years ago (0.4% p.a.). 

M2 growth remained strong in April at 6.5% yoy. Lending growth slowed for the third consecutive month on weak credit demand to 3.1% yoy in April, its lowest in 16 months. 

However, if investment and exports recover as expected, credit demand and credit growth should bottom out soon as well.