Taiwan Central Bank Watch:Holding through Fed policy changes

The Central Bank of China (Taiwan) (CBC) will meet on 21 September, the same as theFOMC meeting. Our US economist expects the Fed to announce the commencement ofbalance sheet contraction (see FOMC Preview, 17 Sep, Kevin Logan). Unless there is asignificant market reaction, we expect the CBC to be keep the policy rate on hold.

    Export growth still going strong. The Taiwanese economy grew 2.4% y-o-y in 1H2017, up from 0.5% y-o-y over the same period in 2016. On the current trajectory, thegovernment’s full-year growth target of 2.1% looks well attainable. Economic growthremains supported by strong external demand. Private consumption growth also showedmore resilience amid the rising stock market, even as investment growth saw anunseasonably sharp decline. Leading indicators such as the PMI and export orderscontinue to suggest strong growth in the near term, and should stay strong as we headinto the holiday shopping season.

    A strong Taiwanese dollar is unlikely to pose a big drag on the export-led recovery.

    The TWD has appreciated 6% versus a basket of currency over the past 12 months(Bank of International Settlement). The strength in the currency has raised questions overthe impact on growth. Our regression, however, suggests that global demand is far moreimportant. Therefore, if the pickup in global demand is sustained, export growth will likelyremain strong for now.

    Inflation remains manageable. Headline CPI inflation edged up marginally to 1.0%y-o-y in August, up from 0.8% y-o-y in July, while core inflation remains extremelysubdued. Higher public sector pay and higher taxes may push up the inflation printin 2018, but to a limited degree in the absence of a meaningful acceleration indomestic demand.

    Fed policy and succession talk. Taiwan has benefited significantly from better globaldemand over the past year. As the Fed (and potentially more developed market centralbanks) embarks on policies to withdraw accommodation, it can bring uncertainty toTaiwan’s export-driven and externally-reliant economy. Meanwhile, Governor Perng Fainan’sterm will end on February 2018. Our base case is that growth will be stable and thenew governor’s policy will prioritise continuity and stability, but we will remain watchful ofhow these new policies play out.