Taiwan’s sticky inflation strengthens the case for a September hike
Lead — Taiwan's persistent inflation signals a stronger possibility for a central bank rate hike in September, as local inflation metrics remain elevated. Per the full note from ING, the CPI remained stable at 2.54% YoY, suggesting that price pressures are resilient despite recent decreases in transport-related costs. With growth surpassing expectations and further inflation trends evident, the window for action by the Bank of Taiwan is increasingly narrow as it weighs monetary policy.
What the desk is arguing
The desk believes that Taiwan's inflation dynamics strongly support the case for a rate hike in September. Given that July's CPI has edged down marginally but remains above market expectations, this indicates a potential for sustained inflation pressures influencing monetary policy. Per the full note from ING, food inflation hit a ten-month high of 2.5% YoY, alongside notable increases in housing inflation and continuing high PPI inflation.
The 16.94% YoY rise in PPI is particularly striking, suggesting underlying supply chain costs remain significant. With import and export prices also trending higher, the Bank of Taiwan faces growing pressure to combat inflation and support currency stability.
Where it sits in our coverage
Our current consensus target for the TWD against the USD stands at 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan and positions our expectation towards the upper end of the forecast spectrum given the recent inflation data suggesting an immediate need for the central bank to act.
How other firms see it
Analysts aligned with the current market view include jpmorgan, advocating for a hawkish stance, while bofa holds a contrary position anticipating a more cautious approach from the central bank. Overall, there’s a broad consensus that inflation trends will influence near-term monetary policy decisions.
Indicators like USD/TWD should be monitored closely as they reflect market sentiment surrounding the Bank of Taiwan's policy direction moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Taiwan's CPI holds steady at 2.54% YoY, indicating persistent inflation.
- 02PPI inflation rises sharply to 16.94%, surpassing previous peaks.
- 03Food and housing inflation are climbing, intensifying inflationary pressures.
- 04The likelihood of a rate hike in September strengthens as local growth remains robust.
Market implications
Traders should watch for movements around levels such as 1.075 USD/TWD as market sentiment shifts in response to potential policy changes. Any commentary from the Bank of Taiwan ahead of the September meeting could further elucidate market expectations.
Risks to this view
A change in global commodity prices or unexpected geopolitical events could inverse Taiwan's inflation trajectory, reducing the likelihood of a rate hike. Additionally, if economic growth data underperforms expectations, it could prompt the central bank to maintain a more dovish stance despite inflation pressures.
Older quick take Quick take Published 10:25 Taiwan Taiwan’s sticky inflation strengthens the case for a September hike Taiwan's CPI inflation stayed sticky at 2.54% YoY, while PPI rose to 16.94% in July. Combined with another quarter of stronger-than-expected growth, local factors look increasingly in favour of a rate hike in September Food inflation rose to 2.5% YoY in July, a 10-month high Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Lynn Song Chief Economist, Greater China 2.54% YoY Taiwan's July CPI inflation Sticky inflation strengthens case for a September rate hike Taiwan's CPI inflation was little changed in July, coming in at 2.54% YoY, down marginally from 2.59% YoY in June, and coming in slightly higher than expectations (market: 2.5%, ING: 2.4%). Core inflation also came in a little hotter than expected, at 2.38% versus expectations of 2.3% YoY.
The fall in oil prices in late June and early July translated to lower transportation inflation in Taiwan, which fell from 4.1% to 2.7% in July. This was the category with the biggest drop in July. However, most other categories saw inflation stable or trending higher.
Food inflation rose to 2.5% YoY in July, a 10-month high. Housing inflation also trended higher to 2.3% YoY, an 18-month high. PPI inflation also continued to rise, up to 16.9% YoY, passing the Russia-Ukraine war peaks.
Computers, electronic and optical products (36.6%), as well as petroleum and coal products (33.4%), were the leading subcategories driving PPI inflation higher. Finally, Taiwan continues to see higher import and export prices. The import price index rose 16.6% YoY in July, and is up 11.6% YoY year-to-date.
As expected, we see a notable acceleration of mineral product import prices, up 29% YoY in July, and continued higher prices in tech imports, as seen in the 21.4% YoY increase in machinery and electrical equipment import prices. Export prices rose by even more, up by 19.7% YoY in July, and up 15.4% YoY year to date. Machinery and electrical equipment, the largest export category, saw a 23.7% YoY price increase in July.
Overall, this disparity between the export and import price indices suggests that Taiwan is benefiting from higher prices this year. Overall, CPI inflation is still clearly above the 2% target, and PPI inflation has yet to confirm a peak. Barring a significant cooling in the August data, both economic activity and inflation suggest a strong case for a September rate hike when the CBC next meets.
With the CBC meeting scheduled the day after the Fed's September decision, any unexpected Fed rate hike, which is not currently part of ING's base case, could further strengthen the case for the CBC to tighten. At present, we are one of just seven out of 29 forecasters expecting a CBC rate hike in September. Inflationary pressures look to be strengthening the case for a rate hike Taiwan Monetary Policy Inflation Asia Pacific Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Older quick take
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