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Export slump may nudge Taiwan to first rate cut since 2011

A man exits the headquarters of the Central Bank of the Republic of China in Taipei, Taiwan.
Maurice Tsai | Bloomberg via Getty Images
A man exits the headquarters of the Central Bank of the Republic of China in Taipei, Taiwan.

With faltering external demand stifling growth prospects, Taiwan's central bank may finally give in to a rate cut at its quarterly meeting on Thursday, after having kept its policy interest rate at 1.875 percent since 2011.

"The recent string of poor data from Taiwan has raised concerns that external demand will remain sluggish. We now see a 60 percent chance of a 12.5 basis-point cut in the discount rate at the September meeting," Societe Generale economist Claire Huang wrote in a note last Friday.

The Central Bank of the Republic of China (CBC), which last met on June 25, has so far stayed put on rates even as nearly 30 central banks this year formed an unprecedented global easing wave aimed at bolstering growth and inflation. The CBC last tweaked its key rates in July 2011 with a 12.5 basis-point hike.

However, less-than-stellar exports orders data released on Monday may spur the central bank to step up support for the trade-reliant Asian economy, which looks set to grow at its slowest pace in six years, analysts predict. Last month, Taiwan's chief statistics agency slashed its 2015 growth forecast to a six-year low of 1.56 percent.

Taiwan's annual export orders slumped 8.3 percent last month, said the Ministry of Economic Affairs, nearly double of the 4.6 percent fall expected in a Reuters poll and marking the worst contraction in overall exports since August 2009. A slower-growing China – Taiwan's biggest export markets after the U.S. – is the prime culprit.

"The sharp slowdown in China's industrial and construction sectors (i.e. the secondary industry) has weakened Taiwan's exports, outweighing any improvement in trade with advanced economies." Hong Kong-based Huang said.

Growth in China's secondary industry slowed to 1.7 percent on-year in the first half of 2015, from 5.8 percent on-year in H1 2014, SocGen's note said. With the mainland accounting for 40-50 percent of purchases of Taiwan's industrial supplies such as chemicals and cement, the sharp slowdown in China's secondary industry has dragged down Taiwan's exports of late, Huang explained.

And a recovery isn't on the cards in the near term.

"We expect [the] secondary industry's nominal gross domestic product (GDP) to decelerate further to 1 percent in 2016… this would add further downward pressure on Taiwan's growth. Taiwan's central bank is not going to overlook this factor given its higher integration with mainland China," SocGen said.

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In this chart provided by Societe Generale, 'o/w' refers to 'of which.'
Societe Generale
In this chart provided by Societe Generale, 'o/w' refers to 'of which.'

Inflation under control

Meanwhile, the Taiwan central bank on Monday reiterated its view that inflation in the domestic economy remained under control, which analysts interpreted as an inclination toward further easing.

The core consumer price index (CPI), which excludes energy, fruit and vegetable prices, rose 1.67 percent in August from a year earlier.

"Despite concerns that a weaker Taiwan dollar would add to inflationary pressure ahead, we are not concerned considering how low inflation is for Taiwan and given sustained weakness in commodity prices," analysts at Deutsche Bank wrote in a note issued on September 18.

Deutsche Bank sees the CBC reducing the discount rate by 12.5 basis points this week and isn't ruling out the possibility of a bigger rate cut of 25 basis points.

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Looser policy intent?

The possibility of looser monetary policy also increased after Taiwan's central bank cut the overnight interbank rate to 0.32 percent in August, analysts said.

The rate at which banks can borrow from each other in the interbank market on a short-term basis had remained at 0.388 percent since 2012, but was guided lower last month after China's unexpected yuan depreciation on August 11.

"The pace of liquidity [withdrawal] did not slow [after the cut in overnight rates] but rather accelerated, indicating plentiful liquidity in the financial system. This means the central bank can easily guide rates lower, even with [an] escalation in liquidity absorption," SocGen's Huang noted.

However, Australia and New Zealand Banking Group (ANZ) disagrees. According to a note by ANZ on Monday, the rate adjustment signals that policymakers are stepping up on monetary policy easing as a reaction to volatility in the financial markets, instead of a response to weakening economic conditions.

"Therefore, we do not consider the fall in the overnight rate to be [a] definitive signal for a policy rate cut this week. We continue to view the Federal Open Market Committee's rate decision as an anchor for Taiwan's policy rate, which will likely be kept at 1.875 percent," said analysts who expect the central bank to stand pat on rates.

"However if the CBC chooses to cut rates, it will merely be symbolic," ANZ added.