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Taiwan Monetary Policy March 2024

Taiwan: Central Bank hikes rates in March

At its monetary policy meeting on 21 March, the Board of Directors of Taiwan’s Central Bank (CBC) hiked the discount rate from 1.875% to 2.0%, following three consecutive holds. The decision surprised markets, which had expected a hold.

The decision to hike was driven by the desire to contain inflation—which in the past six months has been more than double the 2014–2023 average—and stop inflation expectations from drifting upwards. Upside risks to inflation are posed by a proposed hike to electricity rates from April. In addition, the Bank upgraded its GDP projections for 2024 and expects activity to strengthen this year thanks to recovering exports and private investment; the interest rate hike thus aimed to ward off any demand-push inflationary pressures generated by the stronger economy.

The Bank gave no explicit forward guidance, but said it would stay mindful of the impact of electricity rates and the green energy transition on inflation. While our panelists are still assessing the Bank’s latest move, the rate hike is unlikely to be the start of another prolonged tightening cycle, given our panelists’ projections for inflation to fall below 2% by end-2024.

On the outlook, Goldman Sachs’ Lu Sun said:

“Despite the hike, governor Yang mentioned CPI is expected to go below 2% by 4Q24, and see limited upside for interest rate from here. This is also in light of other DMs are likely to start cutting rates in 2H. He also keeps the door open for rate cut if Taiwan inflation comes lower.”

On the reasons behind the March hike, ING’s Lynn Song said:

“It’s possible that a contributing factor was a higher-than-expected February inflation read, which rose to a 19-month high of 3.08% year-on-year – but in our view, this was skewed by the Lunar New Year effect. A stronger-than-expected start to exports in the year may have strengthened the central bank’s conviction in the growth outlook […] we will likely see stable rates at the next few meetings, barring any major changes to the outlook.”

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