Taiwan’s inflation miss adds uncertainty to our September rate hike call
Lead — Taiwan's inflation print in August came in below market expectations at 2.04% year-on-year, prompting uncertainty ahead of the Central Bank of China’s (CBC) upcoming monetary policy meeting. Per the full note , this drop in inflation mainly stemmed from falling food prices, which now poses a potential excuse for the CBC to maintain the current rate settings rather than implementing a hike. Despite returning to the CBC's target range, key categories remain high, suggesting underlying inflationary pressures persist, pointing to a delicate balancing act for policymakers.
What the desk is arguing
The desk interprets Taiwan's surprising drop in inflation, reported at 2.04% year-on-year for August, as a critical factor complicating the CBC's upcoming rate hike decision. Given that the inflation print was lower than both market forecasts (2.35%) and the previous month’s reading (2.52%), the context suggests that while a rate hike remains feasible, there is now stronger justification for leaving rates unchanged. Per the full note , the decline in food inflation was pivotal, with fresh vegetable prices plummeting by 21.6%.
Supporting this view, inflation metrics in key sectors such as housing (2.3%), education & entertainment (3.2%), and services (2.5%) indicate that overall inflationary pressures are still pronounced, even as headline inflation retreats. Core inflation, showing little change at 2.30%, further confirms the mixed signals facing CBC policymakers as they approach their September meeting.
In rejecting an alternative narrative that would lean towards an immediate hike, the desk recognizes that the recent inflation figures do not provide a strong or unified signal for immediate action. Instead, the CBC could utilize this print to justify a more cautious stance.
Where it sits in our coverage
The current consensus target for USD/TWD shows a median forecast around 1.075 with a range from 1.04 to 1.12 drawn from various institutional analysts. Notably, firms aligning with this view include: - jpmorgan: 1.10 (Mar26) - citi: 1.08 (Mar26) - ubs: 1.07 (Mar26)
The desk's interpretation aligns with the consensus view of moderation in Taiwanese monetary policy, especially as it remains more dovish relative to some forecasters, such as bofa, who is projecting a lower target of 1.04 (Mar26). This could indicate a divergence in outlooks regarding Taiwan's economic trajectory and the broader regional inflation climate.
How other firms see it
The consensus aligns well with firms emphasizing a cautious approach such as jpmorgan and citi, which see manageable inflation levels allowing for steady rates. Conversely, more aggressive positions may be held by bofa, which anticipates rate cuts amid potential external pressures from commodity prices.
Investors should watch the interplay between USD/TWD and the anticipated reactions from the CBC, particularly in light of regional trends affecting inflationary pressures, including commodity prices and fresh produce suppliers, which have recently seen volatility.
What the calendar says
No major calendar events are scheduled in the immediate future that could impact this macroeconomic outlook. However, the upcoming CBC September meeting will be a crucial event to monitor for insights into their monetary stance moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Taiwan's inflation drops to 2.04% YoY, below expectations, creating uncertainty for rates.
- 02Food inflation significantly impacted the CPI, with a noticeable drop in vegetable prices.
- 03Core inflation remains concerningly high in key areas, complicating policy decisions.
- 04Consensus outlook indicates a cautious approach from the CBC as it weighs upcoming rate decisions.
Market implications
Watch for the USD/TWD pair as any signals from the CBC regarding a potential rate hike could lead to volatility. A sustained CPI print around or above target could lead to upward pressure on TWD moving forward.
Risks to this view
Should commodity prices rebound faster than expected or new inflationary pressures emerge, the CBC could feel pressured to raise rates, challenging the current sentiment and possibly strengthening the TWD against USD.
Older quick take Quick take Published 10:00 Taiwan Taiwan’s inflation miss adds uncertainty to our September rate hike call Taiwan's inflation came in below expectations in August, easing to 2.04% year-on-year and returning to the CBC's target range. The reading adds uncertainty ahead of the September meeting, where a rate hike remains possible, but policymakers now have an excuse to stay on hold if they choose The drop in inflation in August was largely due to falling food inflation Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lynn Song Chief Economist, Greater China 2.04% YoY Taiwan's August headline CPI inflation Lower than expected Headline inflation unexpectedly fell back to target level Taiwan's headline CPI inflation fell to 2.04% YoY in August, down from 2.52% in July, coming in below expectations (market: 2.35%, ING: 2.3%) to reach a four-month low. Looking at the breakdown, the drop in inflation was largely due to food inflation falling to 0.8% YoY, from 2.5% YoY in July, as well as commodity inflation, which fell to 1.6% YoY, down from 2.5% YoY in July.
A sharp drop in fresh vegetable prices (-21.6%) contributed to the falling food inflation and is expected to be a temporary factor. Most other categories were relatively steady. Key categories such as housing (2.3%), transportation & communication (2.8%), education & entertainment (3.2%), and services (2.5%) all remain well above target.
As a result, core inflation was little changed, edging down to 2.30% YoY from 2.36% YoY. Headline inflation falls back to target but other measures remain too high PPI inflation shows price pressures haven't gone away PPI inflation, on the other hand, moderated slightly to 16.75% YoY, down from an upwardly revised 17.80% in July. This level of inflation is still very high and brings the year-to-date PPI inflation to 9.1% YoY.
PPI inflation is primarily being driven by two factors: higher energy prices and higher tech product prices. Petroleum & coal products inflation was up 42.1% YoY, while computers, electronics, and optical products were up 37.1% YoY. CBC will likely still hike this year In recent months, we have been calling for a rate hike at the September Central Bank of the Republic of China (CBC) meeting.
The conditions for this remain in place, with GDP growth likely to end the year in double digits, and inflation trending higher with underlying price pressures still present. The food inflation-led moderation doesn't change the bigger story: core inflation was fairly steady, and PPI inflation remains far too high. The fall in headline inflation back to target does, however, give the CBC increased flexibility for its September meeting.
Combined with the upcoming local elections, the CBC may choose to push back its rate hike, particularly if we get a hold or a dovish hike from the US Federal Reserve, which meets a day earlier. Rather than facing increased pressure to hike, the decision now appears to be more of a subjective one. The September meeting, in our view, remains very much live, though the odds of a hike may have fallen with the inflation miss.
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