Taiwan’s central bank announced another inter-meeting policy rate cut of 25 bp on November 9. This move brings the policy rate to 2.75%, from 3.00% previously. The central bank has cumulatively reduced the policy rate by 87.5 bp since late-September.
In our view, the recent decline in inflation has offered the central bank more flexibility to ease policy, when faced with weakening external demand. October CPI inflation eased to 2.4% yoy, from 3.1% yoy in September. We also expect core inflation to trend down further, on the back of slower domestic demand and easing headline CPI inflation. On the other hand, the recent trade data showed that the export cycle continues to deteriorate. Therefore, it is perceivable that the central bank is shifting its policy focus towards preserving growth, and away from combating inflation.
We expect another 25-bp rate cut by the central bank in its upcoming December policy meeting. Our US economists are now expecting another 50-bp cut in the Fed Funds rate by the Fed by year-end. We believe this also gives Taiwan’s central bank more room for further easing, in anticipation of a weaker growth outlook to come. Going into 2009, we believe any further rate cuts by the central bank is now a close call, and is dependent on the decision by the Fed.
Taiwan was already amongst the first in the region to switch to an easing mode, with a reduction in the reserve requirement ratio and an injection of liquidity on September 18. Taiwan is also amongst the first in the region to provide guarantees to deposits and interbank loans, and raised the government guarantee levels of banks’ loans to small-medium enterprises. We believe the swift and anticipatory policy actions would help Taiwan mitigate further downside risks to growth.
Nonetheless, with a weaker global industrial cycle ahead, we continue to expect the GDP growth momentum to slow further in 2009. We expect GDP growth to slow to 2.2% in 2009, from our forecasted 3.0% in 2008. Our forecasts are currently below the consensus forecasts of 3.9% and 3.6% respectively. With a more opaque exports outlook ahead, we see few catalysts in lifting domestic demand. One silver lining is that we believe Taiwan can afford to ease both monetary and fiscal policies, on the back of easing inflation and the improving fiscal position. Nonetheless, we believe the cyclical headwinds from a weakening global macro outlook should still prevail in the near term.
