The central bank might cut interest rates this month and again in December, as GDP growth disappointed and softness is spreading to domestic demand, JPMorgan Chase & Co said in a report.
“We expect two rate cuts of 12.5 basis points in the second half as GDP growth disappointed, softness in consumer prices broadened and the property market started correcting,” JPMorgan’s Hong Kong-based economist Grace Ng (吳向紅) said.
The contraction of the export sector and of industrial activity seems to have fed into the labor market, where job growth eased to the slowest sequential pace since September 2009, limiting support for consumer spending, Ng said, adding that retail sales after seasonal adjustment fell 1.9 percent in July.
The US financial institute has trimmed its forecast for Taiwan’s GDP growth this year to 1.3 percent, with risks titling to the downside.
Growth concerns, mainly in domestic demand, might drive the central bank to cut discount rates that have held steady at 1.875 percent for 16 quarters.
The central bank is to hold a quarterly board meeting to review rates later this month.
MONETARY EASING
Taiwan appears to have reached a juncture for rate cuts as the central bank last month indicated that it would be appropriate to adopt “accommodating monetary policy to complement expansionary fiscal policy,” the report said.
Besides growth disappointments, the consumer price index has deflated, giving the central bank room to comfortably embark on monetary easing, the report said.
An oil price-based decline in headline CPI appears to be spreading into broader disinflation, as the core CPI slowed and service prices dropped, the report said.
The property market boom over the past decade had been one of the central bank’s key monetary considerations, but property prices started to correct in the second half of last year, Ng said.
The central bank lifted mortgage policy restrictions from parts of New Taipei City and Taoyuan last month, signs that it is to shift attention away from the property market and has grown receptive to monetary easing, the report said.
The US Federal Reserve’s rate outlook is a key constraint on central banks in emerging markets and JPMorgan expects the first rate hike to take place by the end of this year.
The wide current account surplus should provide room for the central bank to introduce moderate rate cuts without triggering concerns about payment vulnerability or local currency depreciation, Ng said.
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