Rate hike expectations in the coming quarters gaining build-up in Taiwan

But a rate hike could be premature.

Taiwan's central bank (CBC) will meet this week to review monetary policy, and in line with market consensus, it is expected that the CBC will hold the benchmark discount rate steady at 1.875% for the 13th successive quarter.

According to a research note from DBS, expectations about rate hikes in the coming quarters are gradually building, alongside the increase in expectations about Fed tightening.

Given the close correlation between Taiwan's and US's rate cycle in the past, questions are emerging whether the CBC will send message about a future policy shift at this meeting.

Here’s more from DBS:

It remains premature for the CBC to hike rates or signal the intention of hiking rates, in our view. Taiwan's economic growth is accelerating as the export industry benefits from the US's recovery and the increase in iPhone-related electronics demand.

But concerns about the sustainabiilty and the strength of export recovery have re-surfaced in recent weeks, in light of the faster-than-expected economic slowdown in China and Europe.

On the domestic front, consumer confidence has deteriorated and stock market prices have fallen since one month ago, due to the interruption impacts from the gas explosion accident, food safety scandals and political uncertainties related to the upcoming local government election.

Against this uncertain backdrop, the CBC would prefer to maintain a wait-and-see stance to have more time to evaluate the underlying economic trends.

The need of hiking rates will become urgent if capital outflows increase as a result of Fed tightening and/or inflation pressures increase. Capital outflows are not a big concern right now.

Although the TWD has depreciated versus the USD following the FOMC meeting last week, the TWD NEER has remained stable at a multi-year high.

On the relative basis, the TWD held up very well compared to other emerging Asian currencies including the SGD and the KRW, and appreciated versus the EUR and the JPY.

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