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Taiwan Monetary Policy September 2018

Taiwan: Central Bank stands pat in September as trade war headwinds mount

Taiwan’s Central Bank of the Republic of China (CBRC) maintained course for the ninth consecutive quarter at its 27 September 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 mild inflationary pressures, robust—yet softening—domestic momentum, along with growing headwinds for the all-important external sector due to the recent escalation of the US-China trade war.

Although the CBRC revised its 2018 growth forecasts marginally upwards from 2.68% in June to 2.73% in September—in light of a strong Q2 print—the institution sees momentum softening somewhat in H2 and beyond amid a global slowdown and increased financial volatility, notably in emerging markets such as Turkey and Argentina. Indeed, the Bank projected this slowdown to affect Taiwanese export growth and investment in 2019, although it noted that this should be somewhat compensated by an increase in public investment, while private consumption growth will remain the backbone of economic growth. Overall, the CRBC forecast GDP to increase 2.48% in 2019.

Against this backdrop, the Bank estimated that the inflation outlook should remain mild in coming quarters. Although it slightly raised its 2018 inflation and core inflation projections to 1.50% and 1.28%, respectively (June: 1.40% and 1.16%, respectively), it also forecast both headline and core inflation to slow down markedly in 2019, to 1.05% and 1.00%, respectively. A small majority of FocusEconomics Consensus Forecast panelists currently expect the Bank to leave the policy rate unchanged until the end of the year, with the first rate hike likely occurring in Q1 2019. Nevertheless, due to a strong 2018 growth outlook and the exchange rate pressure brought upon by continuous interest rate hikes by the U.S. Federal Reserve, a number of our panelists see the rate hike happening at the next monetary policy meeting, which is scheduled for 27 December.

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