2016.04.0802:33:00UTC+00Core Inflation in Taiwan to Remain subdued Through Rest of 2016

Taiwan’s inflation in March reached 2% y/y, lower than 2.4% in February and higher than January’s 0.8% and average of -0.35% in 2015. Below expected easing of inflation in March is due to continuous elevation of food inflation, according to DBS Bank. In March, overall food prices rose 8.6%, as compared with 8.5% in February and 2.7% in January. The supply-side disturbance impacts have continued to be in place, added DBS Bank. This was seen in the surge in vegetable prices that rose 79.1% in March, as compared with 80.7% in Feb.

However, food inflation is still likely to be a temporary event, noted DBS Bank. Last year, vegetable prices took three months to normalize entirely after surging due to the typhoon weather in the summer. If this pattern repeats, food inflation is expected to decelerate by June to 3%, consistent with the 2015 average, added DBS Bank.

“Assuming other CPI components are stable, headline inflation will fall back to 1% in Apr and to about 0% in May-Jun”, says DBS Bank.

Core CPI, stripping energy and fresh food, continued to be stable at 0.8% last month. For the remainder of 2016, core inflation is expected to remain low on the back of a weaker labor market, a negative output gap and weakness in wage growth, noted DBS Bank. Energy inflation is not expected to be a problem either.

“Assuming crude prices remain at the current levels and the TWD is stable, energy prices growth will turn positive (YoY) only in the end of this year”, added DBS Bank.

Central bank policymakers are not expected to change their view on inflation outlook or thinking on monetary policy, said DBS Bank. It added that growth data will play a major role in the central bank’s decision of whether to continue lowering rates in the forthcoming meetings.

“We currently maintain the forecast for a 12.5bps rate cut at June’s monetary policy meeting”, noted DBS Bank.