Taiwan’s central bank likely to slash rates on Thursday, to stay pat in December

The Central Bank of the Republic of China (Taiwan) (CBC) is expected to slash its discount rate at the monetary policy meeting scheduled to be held on Sep 29, 2016. However, it is seen to hold fire at the next policy meet in December.

The CBC is likely to cut the discount rate by 12.5 basis points, before holding it steady at 1.25 percent, DBS reported. However, from the growth perspective, the pressure for the central bank to cut rates has been reduced. The latest export orders data reported a strong rise of 8.3 percent y/y for August 2016, largely owing to the surge in electronics demand as the iPhone effects kicked in.

However, it remains to be seen how well the rise in export orders will be translated into domestic growth. As of August, export shipments gained only modestly by 1.0 percent, while PMI rose only slightly above 50.

"In addition, from the perspective of inflation and real interest rates, we also see the room for the CBC to ease further," DBS commented in its latest research report.

Given that the strength and the duration of recovery remain uncertain, it is still likely that the CBC will cut rates in order to provide adequate support to the economy. The delay of Fed rate hikes and the TWD’s stability also offer a favorable external backdrop for the CBC to lower rates and to focus on supporting growth.

Meanwhile, headline CPI and core CPI stood at 0.6 and 0.8 percent respectively during last month, both below the 1-year time deposit rate of 1.04 percent. Given that a 12.5 basis points cut in the discount rate will lead to 7-8bps decline in the 1-year deposit rate, real deposit rates will remain positive if the CBC cuts this week, the report added.