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Taiwan Monetary Policy March 2018

Taiwan: Central Bank leaves key rate unchanged in March but raises its 2018 growth outlook

Taiwan’s Central Bank of the Republic of China (CBRC) stayed the course at its first monetary policy meeting of 2018, held on 22 March. The unanimous decision from the Board to keep the discount rate unchanged at 1.375% was widely expected by market analysts, despite a closely-watched decision by the U.S. Federal Reserve to raise its benchmark rate just hours before the CBRC’s policy meeting. Indeed, with both current inflationary pressures and future inflation expectations still mild, a majority of analysts do not pencil a rate hike before the last quarter of 2018. The March decision marked the seventh consecutive quarter in which the CBRC decided to leave rates unchanged.

Export-oriented sectors, which had driven the growth uptick in 2017 amid a surge in global trade flows, continued to expand at a strong rate in the first months of 2018, buttressing industrial output and household spending. This was a leading factor in the Bank’s decision to raise its 2018 GDP growth outlook to 2.58%, up from the 2.42% projected in February. Despite the improvement in the outlook, the Bank signaled its concerns over the brewing trade dispute between the U.S. and China, which would deeply affect Taiwan, as the country is tightly integrated in the global supply chain. The uncertainty resulting from this political dark cloud weighed on the CBRC decision, further justifying the approach it has maintained so far.

In addition to inflation, which is showing some upward momentum but remains moderate, upcoming CBRC decisions will likely hinge on two crucial factors: The exchange rate with the U.S. dollar, which has kept appreciating in recent months and weighs on the competitivity of the all-important export sectors, and the interest rate differential with the Federal Reserve, which has been growing since the Fed embarked on its tightening cycle in late 2016. A large difference in interest rates would be an incentive for capital outflows, which would hurt investment on the island. On the other hand, any rate hike by the CBRC would put further upward pressure on the Taiwanese dollar and might hurt the growth momentum. Thus, the Bank is expected to tread carefully in the coming quarters to balance these two opposite objectives, raising the interest rate slowly as inflation strengthens. Against this backdrop, the Bank left its inflation forecast for 2018 stable at 1.27%.

The March monetary policy meeting was the first one to be presided by the newly appointed Central Bank Governor Yang Chin-long, who previously served as Deputy Governor for ten years, and should represent policy continuity. The next monetary policy meeting is scheduled for 21 June.

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