Taiwan central bank likely to enter hiking cycle in 2017, to focus on exchange-rate policy

The central bank of the Republic of China (Taiwan) (CBC) is expected to pause the easing cycle in 2017, cautiously assessing the timing of the first interest rate hike. The CBC will primarily focus on the exchange rate policy going forward.

In 2017, the CBC's policy rate stance will continue to largely follow the lead of the US Federal Reserve. However, we also believe its policy function will be overweight export competitiveness and not want a too-strong TWD, reported ANZ.

 At present, the forward markets, both onshore deliverable forwards and offshore non-deliverable forwards, notably 180 days, are not priced for currency depreciation. To express its policy intent, Taiwan's central bank will delay its rate hike and narrow the policy rate spread between TWD and USD. The current benchmark interest rate of the CBC is 1.375 percent, compared to the United States Federal Reserve’s 0.50-0.75 percent.

"Our view is that the CBC will attempt to delay a policy rate hike until September 2017 when the rediscount rate will be lifted to 1.500 percent, followed by another increase of 0.125 percent in December," the report said.