Taiwan central bank leaves discount rate unchanged

Analyst says keeping the discount rate at 1.875% came as no surprise.

DBS Group Research said:

The Taiwan central bank (CBC) yesterday left the discount rate unchanged at 1.875% as widely expected. The CBC said in the policy statement that they will closely monitor the future inflation risks. This should be aimed at anchoring public inflation expectations amid the recent oil price increases, especially because the government is now mulling plans to hike electricity prices and adjust the domestic fuel-pricing mechanism.

The rhetoric on inflation does not suggest a rate hike anytime soon. As the growth recovery is expected to be moderate in the coming quarters, the pass-through effects of higher oil and electricity prices would not be significant and the underlying core inflation should stay largely stable. Note that policymakers yesterday maintained a conservative view about the global growth outlook, and expecting domestic growth to be lower than last year’s because of the weakness in exports and investment. A resumption of rate hikes will require global recovery to continue (European crisis can be contained), and domestic growth to match the potential rate in a sustainable manner.

Our base case forecast is that the CBC will hold rates steady at 1.875% through 2012, before raising rates from 1Q13.