• Weakening outlook for economy, export growth point to a cut
  • Dovish Fed may spur central bank to stem inflows, Goldman says

Taiwan is seen cutting its benchmark interest rate for the fourth consecutive quarter at a policy board meeting this week amid fresh export uncertainty brought by Britain’s vote to exit the European Union and a weaker economic growth outlook.

Twenty-three of 26 economists in a Bloomberg survey taken June 22-27 predicted another benchmark rate cut when the board of the Central Bank of the Republic of China (Taiwan) meets June 30.

The monetary authority has lowered its policy rate at every meeting since September 2015 to the current 1.5 percent, from 1.875 percent, amid waning demand for the island’s exports. Shipments have contracted year on year every month since February 2015.

As a result, the government was forced in May to slash its 2016 gross domestic product growth forecast to 1.06 percent from 1.47 percent. Overseas demand for Taiwan’s goods accounts for about two-thirds of GDP.

Material Impact

Following Brexit, “the negative impact from a tougher growth prospect of the global economy will likely be material” for Taiwan, Bank of America Merrill Lynch said in a recent note. Risk-off sentiment worldwide and a potential strengthening of the U.S. dollar “could result in capital outflows from the financial markets, in turn harming investment demand and business sentiment.” The firm sees GDP growth of just 0.8 percent for 2016 and a 12.5 basis point rate cut at each of the three remaining board meetings this year.

On the other hand, Taiwan’s central bank may also see a need to cut rates to stem inflows, according to analysts from firms including Goldman Sachs Group Inc., with the Federal Reserve’s dovish stance suggesting funds may head for markets such as Taiwan. That could push up the local currency at a time when demand for Taiwan’s goods is falling.

Global investors have bought a net $5.72 billion of Taiwan equities so far this year, contributing to a 1.6 percent gain for the Taiwan dollar, ahead of the South Korean won and the Chinese yuan, which have depreciated.

Limited Fallout

Central bank governor Perng Fai-nan said in March that monetary policy was already loose and that further decreases, even if they may not be effective at boosting investment, could be used to curb inflows. Stemming potential investment purchases of the Taiwan dollar could damp currency appreciation and aid export competitiveness.

The central bank said in a June 24 statement Taiwan would experience limited fallout from the U.K. vote. Trade could be affected “in the long run” if the EU economy is hurt by Brexit. The authority pledged to maintain financial stability and order in the foreign exchange market in the event of local dollar volatility, without giving specifics.

“The prospect of economic recovery this year was already very weak,” said Angela Hsieh, an economist at Barclays Plc, who sees policy makers cutting the main rate by 12.5 basis points. “Brexit will probably mean Taiwan’s economy won’t be able to grow more than 1 percent this year.”

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