Here's why Taiwan is likely pressured to cut rates

Inflation dropped to 1%.

According to DBS, after the BOK, RBA and ECB all cut rates this month, there are natural questions that whether other central banks will follow. In Taiwan, such expectations could increase to some extent.

The 1Q GDP disappointed and the government is preparing to downgrade the full year growth forecast later this month. Inflation recently has also fallen to the long-term trend level of 1.0%.

Here's more from DBS:

Last year the rate cut expectations in Taiwan’s financial markets increased strongly during July, when the Greek debt crisis intensified, global economy deteriorated and major central banks including the PBOC and the BOK lowered rates to respond. However, the CBC didn’t move to cut the policy rate.

Instead, they opted to fine-tune liquidity via open market operations. This time, we think the hurdles for rate cuts will remain.

Note that the CBC didn’t fully normalize monetary policy during the post-2008 economic recovery. The policy discount rate was lifted by a total of only 62.5bps since 2010.

The overnight interbank rate – a better benchmark for market yields – rose merely 30bps. The overnight rate of 0.39% today remains lower than the inflation level of 1.0%.

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