Given strong deflation momentum, DBS Bank Ltd (星展銀行) yesterday trimmed its consumer price index (CPI) forecast from 1 percent to 0.7 percent for this year, but said that the uncertainties would come mainly from volatile food components.
Inflation is easing faster than expected in Taiwan, as headline inflation dropped to 0.2 percent in January, down from 0.5 percent last quarter and 1.7 percent in the third quarter of last year, the Singapore-based lender said in a report.
Oil prices have started to rebound thanks to a recovery in global risk appetite, China’s policy stimulus and optimism regarding US-China trade talks, the bank said, adding that they might rise in the coming months, given that OPEC members have started to cut production and the US’ waiver on sanctions on Iran is to expire at the end of next month.
Brent crude oil prices would drop to about US$65 per barrel on average in the first half of this year, but advance to between US$70 and US$75 in the second half, driving full-year energy inflation growth toward zero, the bank said.
Core inflation, which calculates changing prices of goods and services except those from the food and energy sectors, is also likely to be muted this year, DBS said.
The government’s minimum wage increase is expected to have a minimal impact on consumer prices due to an ongoing slowdown in GDP growth, deterioration in the output gap and subdued inflation expectations, it said.
Companies are more likely to absorb the increase in wages by scaling back hiring plans and shifting to part-time workforces, DBS economist Ma Tieying (馬鐵英) said in the report.
However, as food prices tend to be boosted due to disruptions in the vegetable and fruit supply caused by summer typhoons, they might drive uncertainties in headline inflation, Ma said, citing a 4 to 5 percent increase in food prices in 2012 and 2016.
Under the baseline scenario, food inflation is expected to stay at a normal level of 2 percent this year, a moderate pickup from l percent last year, DBS said.
“On the surface, CPI inflation has fallen well below the benchmark interest rate in Taiwan, opening the door for potential rate cuts, but we doubt that the central bank will pursue such moves any time soon,” Ma said.
DBS forecast that the central bank would hold the discount rate at 1.375 percent this year and next year.
The central bank in December last year maintained a neutral policy, as excess liquidity, narrowing interest margins and intense competition in the banking sector are long-standing problems.
To prevent a recession this year, the central bank might not rush to slash rates, as in the past two decades it only cut rates during recessions when monetary stimulus was required, Ma said.
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