INSTANT VIEW 2-Taiwan Sept CPI dips, rate view seen unchanged

TAIPEI, Oct 4 (Reuters) - Taiwan's consumer price index dipped in September from the previous month's spike as vegetable prices stabilised after recent bad weather, though the less than expected decline is unlikely to change view that interest rates will remain on hold.

The central bank had warned at its policy meeting in September that it would be watching inflation closely, and that prices, rather than growth, would inform its rate decisions in future. It kept the benchmark rate on hold at 1.875 percent for the fifth straight quarter.

Inflation spiked to over 3 percent in August, well above the central bank's comfort line of 2 percent as bad weather disrupted food supplies and pushed prices up.

While the CPI is likely to come down further this year as agricultural output stabilises and after Taiwan's government delayed a planned rise in electricity prices, rising international commodity prices may keep inflation above the 2 percent level.

That is likely to mean no change in rates at the next quarterly meeting in December, though lower inflation would give the central bank room to move if the external demand situation deteriorated further.

************************************************

KEY POINTS: SEPT AUG CPI (y/y pct chg) +2.96 +3.43* Reuters poll +2.80

Seasonally adj CPI (m/m pct chg) +0.23 +0.40

Core CPI (y/y pct chg) +0.93 +0.95 WPI (y/y pct chg) -2.19 -0.78* * revised

To see the data in graphic form:

COMMENTARY:

LUCAS LEE, ANALYST, MEGA SECURITIES (TAIPEI)

"The CPI is still on the high side, rising fruit prices have offset the fall in vegetables. There is also the impact of QE3 on international commodity prices and rising oil and electricity costs, so October's CPI could be around 2.5 percent, and it will be November before there is a softening."

RAYMOND YEUNG, SENIOR ECONOMIST, ANZ (HONG KONG)

"Headline inflation edged down in September, largely in line with our expectation, thanks to improving weather. Wholesale prices continued to decline. The figures reinforce our view that price levels will remain an upside risk. Headline CPI is unlikely to return to below 2 percent in Q4.

"The central bank will continue to be vigilant on inflationary risk. Meanwhile, the low rate environment remains a major threat to domestic investors who are looking for yield enhancement opportunities."

TONY PHOO, ECONOMIST, STANDARD CHARTERED (TAIPEI)

"In September the cost of living has gone up because of higher oil prices and this situation is expected to last throughout H2. So even though the CPI peaked in August, inflation should stay above 2 percent before Q2 next year.

"Unless the economy shows improvement, policy makers however would keep interest rates unchanged as exports are not doing well."

KATRINA ELL, ECONOMIST, MOODY'S ANALYTICS (SYDNEY)

"Vegetables prices have eased following earlier weather damage but remain high, keeping price growth high. We expect food prices will continue their gradual deceleration, bringing price growth back to more normal levels. But the government's full-year inflation forecast of under 2 percent remains under threat."

MARKET REACTION:

The data was released before the market opened but is unlikely to affect markets as it was broadly in line with forecasts.

LINKS: -- The Directorate General of Budget, Accounting and Statistics website is

-- For the latest poll of forecasts on Taiwan's economic indicators, click on

-- For all Taiwan news and data, 3000 Xtra users can click on

and BACKGROUND:

-- Taiwan cut its 2012 GDP forecast for the eighth time in a year last month to 1.66 percent, due to weak exports.

(Taipei bureau)

(([e-mail])([phone])(Reuters Messaging: [e-mail]))

Keywords: TAIWAN ECONOMY/CPI