Taiwan delivered the latest signal that weakening growth is quickly overtaking inflation as the primary concern in the capitals of Asia’s exporting economies.
(Bloomberg) — Taiwan delivered the latest signal that weakening growth is quickly overtaking inflation as the primary concern in the capitals of Asia’s exporting economies.
The central bank in Taipei kept its key rate on hold at 1.875% Thursday, its first pause since December 2021, with Governor Yang Chin-long playing down the need for further hikes this year in the expectation inflation is likely to ease.
Officials also downgraded their outlook for full-year growth to 1.72%, citing weak exports and investment. If that estimate comes to pass, that would be Taiwan’s weakest annual growth since 2015.
Services, and not goods, are currently the main cause of Taiwan’s stubbornly high inflation, Yang pointed out at his post-rate briefing Thursday. “As long as nothing unexpected happens, prices will start coming down in the next two months.”
“Revised official GDP and CPI forecasts indicate slower growth prospects and retreating inflation pressures,” wrote Adrienne Lui, economist at Citigroup Inc., in a research note. “We think 1.875% is likely the terminal rate for this hiking cycle.”
Taiwan is the latest export-dependent economy in the region to signal a shift in priorities away from inflation to boosting its flagging economy. China is mulling a wide package of stimulus measures to prop up its economy slowed by weakening consumption, property rebound and exports. Both Japan and South Korea are likely to keep their monetary policy unchanged as inflation eases.
“The interest rate has peaked mainly because of the growth risks and the CBC is using targeted measures to address their concerns in the property market,” Ho Woei Chen, an economist at United Overseas Bank in Singapore said. “There is now more concern over growth risks even though core inflation has stayed sticky.”
“The Fed’s rate pause in June also gives them an opportunity to reassess the impact of previous tightening but the interest rate has likely peaked in Taiwan.”
Taiwan policymakers had hiked at their five most recent meetings, but the Federal Reserve’s decision to hold rates unchanged Wednesday and lower-than-expected inflation data for May eased pressure for another rise in borrowing costs.
While the central bank raised its 2023 inflation forecast to 2.24% on Thursday, it said prices are likely to ease throughout the second half of the year, strengthening the view that further rate increases this year are unlikely.
“With concerns about inflation likely to ease further, we expect the central bank to shift its focus towards supporting demand,” Shivaan Tandon of Capital Economics wrote in a note. “We expect the CBC to deliver a 12.5 basis point cut in September as it attempts to revive the economy.”
New Property Curbs
Taiwan’s economy has fallen into recession this year, shrinking 2.9% in the January-to-March period — the worst performance since the global financial crisis, according to data released late May, when the government cut its growth outlook.
Despite the weakening economy, stubbornly high property prices were another key concern in Thursday’s decision. The central bank took aim at buyers of second homes, instituting a 70% cap on mortgages for such properties in Taiwan’s major cities.
–With assistance from Chester Yung.
(Updates with new lede, new quotes in fourth and fifth paragraphs and additional information in sixth paragraph.)
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