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Taiwan Monetary Policy June 2018

Taiwan: Central Bank holds firm on rates in June, upgrades 2018 growth outlook despite increasing global uncertainty

Taiwan’s Central Bank of the Republic of China (CBRC) stood pat for the eighth consecutive quarter at its 21 June monetary policy meeting. The Board of Directors of the CBRC unanimously decided to leave the discount rate unchanged at 1.375%, matching analysts’ expectations. The decision was made against the backdrop of an increasingly robust domestic outlook that is moderated, however, by growing uncertainties on the external front. Notably, concerns largely loom from slower growth in Europe and China, as well as rising trade tensions originating from the United States. With both current inflationary pressures and future inflation expectations still mild, a majority of our panelists do not pencil in a rate hike before the last quarter of 2018 at the earliest.

Stronger-than-expected growth in Q1, buttressed by robust consumption, contributed to the CBRC’s decision to raise its growth outlook for 2018 for the second consecutive time, from 2.58% in March to 2.68% in June. This decision was also supported by solid growth in the external sector so far this year—although momentum is seen moderating in H2 due to a less favorable base effect—and the likelihood of a pick-up in fixed investment in the following quarters, boosted by higher capital expenditures in the manufacturing sector. Nevertheless, the Bank sees growth momentum moderating somewhat in the second half of the year to 2.30%, notably due to the heightened uncertainty surrounding the global economy. The CBRC sees global trade protectionism as an important downside risk to monitor closely in coming months, and it also indicated it would keep watching developments in other economies’ monetary policy decisions. Indeed, the accelerating pace of interest rate hikes from the Federal Reserve in particular will impact the exchange rate of the Taiwan dollar, affecting both the external sector and inflationary pressures.

Regarding inflation, the Bank indicated that, although oil price increases have been higher than expected, the outlook remains mild due notably to falling prices for telecommunication services. As a result, it upgraded its headline inflation forecast for 2018 but lowered its projection for core price increases, to 1.40% and 1.16%, respectively (March projections: 1.27% and 1.26%, respectively). With inflationary pressures set to remain modest in the near-term, upcoming CBRC decisions will likely hinge on further developments in the global trade environment. The Bank will also want to balance two competing objectives: Preventing large capital outflows resulting from a higher interest-rate differential with the U.S., while maintaining rates as low as feasible to keep the Taiwanese dollar weak and support the critical export-oriented sector. The next monetary policy meeting is scheduled for 27 September.

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