The central bank is likely to keep its policy rate unchanged at 1.875 percent at its quarterly board meeting on Thursday after the US Federal Reserve decided last week to maintain its scale of quantitative easing, HSBC said in a report yesterday.
“We have pushed back our call for the rate normalization process in Taiwan to begin from the second quarter next year, rather than from the first quarter,” following the Fed’s unexpected announcement on Wednesday last week that it would not taper its monthly asset purchasing program, HSBC economist Ronald Man said.
The central bank would likely stand pat on its accommodative policy stance now that global peers will take cues from the Fed and extend the “status quo” for a while, Man said.
A longer period of accommodative monetary conditions in Taiwan would be a complementary policy response to the downgrade in the economic growth forecast by the Directorate-General of Budget, Accounting and Statistics to 2.31 percent for this year, from the previous estimate of 2.4 percent, he said.
A more cautious outlook for the second half of the year accounted for the revision, with weaker investment and trade readings cited as the main drag.
Additional rate cuts are unlikely as liquidity conditions in Taiwan are already loose, HBSC said.
Liquidity is sufficiently ample that the monthly amount absorbed by the central bank through money market operations has grown, reaching NT$5.8 trillion (US$195.75 billion) in July, the highest level since April last year, HSBC said.
The figures suggest there is an excess amount of money in the financial system, which may indicate the limited benefits of rate cuts to support growth in the absence of a major negative shock, Man said.
The British bank believes that the bias of future monetary policy in Taiwan is toward tightening.
High household leverage remains a concern for the central bank after household debt stood at about 86 percent of GDP last year, the highest reading across “emerging” Asia, while loose monetary conditions are blamed as a key driver, Man said.
Housing loans, which make up almost 80 percent of household debt, remain exceptionally cheap with the current interest rate being less than 10 basis points above the policy rate, he said. Consequently, residential property prices grew by 15.4 percent in the second quarter, Man said.