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Analysis

Taiwan Still on the Train to Normal

By Adam Wolfe

In line with consensus, we expect Taiwan’s central bank to hike the 10-day discount rate by 12.5 bps at the Q1 2011 monetary policy meeting. Uncertainty from the Japanese earthquake should be enough to put off a larger move this time, but we expect rising property prices and consumer price inflation to convince the bank to hike rates by 25 bps at its Q2 meeting in June. Residential property prices increased about 13% in 2010, pushing the price-to-income ratio to a historic high. The cabinet on March 10 approved an increase to the sales tax for properties sold within two years of purchase, which should take some wind out of the market, but strong demand and still-cheap mortgage rates will keep prices moving upward. Meanwhile, higher global food and oil prices are filtering into Taiwan’s CPI. Even in our slightly accelerated (though still extremely slow) scenario, Taiwan’s policy rate will remain 137.5 bps below the precrisis high at the end of 2011. The Central Bank of the Republic of China (Taiwan) holds it Q1 policy meeting on March 31. See our latest Taiwan Outlook.

Figure 1: Taiwan's Inflation Is Rising, Interest Rates Need to Follow

Source: Directorate-General of Budget, Accounting and Statistics; Bloomberg

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