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Taiwan Monetary Policy June 2020

Taiwan: Central Bank holds rates at record-low level in June

At its monetary policy meeting on 18 June, the Board of Directors of Taiwan’s Central Bank unanimously decided to maintain the discount rate unchanged at the record low of 1.125%. The hold came after March’s 25 basis point cut—the first policy rate change since June 2016—and took the market somewhat by surprise, with a further cut having been expected by analysts.

The Bank’s decision to leave rates unchanged reflected a willingness to wait and see how the economy evolves over the second half of the year, amid heightened uncertainty due to the ongoing coronavirus pandemic. The Bank referenced the government’s expansionary fiscal policy, its previous loosening of monetary policy and the “normal” operation of the domestic economy as reasons to stay on hold. Furthermore, it sees domestic demand recovering throughout the remainder of the year, with inflationary pressures expected to resurface following four consecutive months of declining consumer prices in May. Nevertheless, the Bank cut its growth projection for 2020 to 1.5% from 1.9%, mostly due to reduced expectations for trade momentum and tourist arrivals, and reduced its inflation forecast to 0.0% from 0.6% on lower fuel and gas prices.

In its communiqué, the Board maintained its accommodative tone, stating that it “will pay close attention to the follow-up development of the epidemic [and], if necessary, the Bank will convene a standing or temporary council to take appropriate measures”. It also reiterated its desire to maintain the stability of domestic foreign exchange markets. This comes on the back of reports of interventions to temper the strengthening of the Taiwanese dollar, which hit two-year highs in mid-June.

Commenting on the Bank’s decision, Iris Pang, an economist at ING, noted:

“It is likely that the central bank is trying to buy some time in the hope that the economy, especially the export sector, will recover very soon. This is not impossible given that Taiwan’s semiconductor industry has successfully filled the gap left by US technology companies. But still, given that unemployment has been hit by Covid-19, and that cases worldwide do not seem to be subsiding quickly, Taiwan’s central bank could still cut interest rates to 1% at the next policy meeting.”

The next monetary policy meeting is set for 17 September.

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