Economic Analysis - Holding Rates To Complement Fiscal Measures - JUNE 2017


BMI View: The CBC kept its discount rate at 1.375% during its monetary policy meeting on March 24, in line with our expectations. While growth appears to be picking up, considerable downside risks will prevent the central bank from hiking rates. The announcement of fiscal measures to ensure sustained growth will enable the central bank to refrain from cutting rates further, as the government takes on the task of supporting growth. We therefore maintain our forecast for the central bank to remain on hold throughout 2017 as it seeks to strike a balance between its various objectives.

The Central Bank of the Republic of China (Taiwan) (CBC) kept its discount rate on hold at 1.375% during its monetary policy meeting on March 24. In its statement, the CBC adopted a cautious view, noting that 'greater economic policy and political uncertainties could be induced by the direction of US policies, the surge in trade protectionism, Brexit negotiations, and crucial elections in major EU member countries'. It further added that 'an adequately accommodative monetary policy stance is conducive to the economic recovery'. We therefore maintain our forecast for rates to remain on hold at 1.375% throughout 2017 as the central bank seeks to strike a balance between its various objectives.

While Taiwan's economic growth appears to be picking up, considerable downside risks remain and we believe that the central bank will refrain from hiking interest rates amid external uncertainties and a fragile domestic recovery. However, a rate cut would lead to the narrowing of the real interest rate differential between Taiwan and the US as the Fed continues with its rate hiking cycle. Furthermore, we do not expect Taiwan to remain in deflation, removing the need for a rate cut to raise inflation. Lastly, the government has announced an investment plan aimed at shifting the economy away from its reliance on exports, and we expect the central bank to keep rates on hold to complement the government's initiative.

Still On A Downtrend
Taiwan - M2 Daily Average, % chg y-o-y
BMI, Bloomberg

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