With exports in doldrums, Taiwan cenbank set to stand pat on interest rates

TAIPEI (Reuters) - Taiwan's central bank is expected to leave its policy rate unchanged this week, according to all economists polled by Reuters, as inflation subsides but exports that drive the island's trade-dependent economy remain in the doldrums.

The central bank is likely to keep the benchmark discount rate at 1.875% at its quarterly meeting on Thursday, according to all of the 25 economists surveyed.

At the last meeting in June, the bank had paused raising interest rates, but said it could not rule out a return to tightening if inflation did not ease.

Looking ahead, the median forecast among those polled was for the central bank to keep the rate at 1.875% for all of 2023 and 2024, before cutting it to 1.5% in the first quarter of 2025.

Inflation has been trending down since the start of the year, although Taiwan's headline consumer price index (CPI) rose to 2.52% in August from a year ago, and above economists' expectations as typhoons pushed up food prices.

Taiwan's exports in August fell on an annual basis for a 12th consecutive month, with matters not expected to improve until the third quarter.

Kevin Wang, an economist at Taishin Securities Investment Advisory in Taipei, said any rate increase would strengthen the Taiwan dollar against other Asian currencies, which could paradoxically weaken demand for the island's exports.

"That's not good for exports," Wang said, adding he therefore expected no rate change by the central bank.

Analyst Johnny Chiang of Masterlink Securities Investment Advisory said that restraint in changing rates is still warranted as a full recovery for exports remains distant.

"Taiwan's 2023 exports are still expected to decline 10% on year," he said.

While exports remain sluggish, the island's domestic economy is faring much better, with unemployment at its lowest in over two decades.

Taiwan is a major producer of semiconductors used in everything from cars to smartphones, but with global consumer demand hit by high inflation and disruptions of the war in Ukraine, Taiwan's economy entered recession in the first quarter.

However, the economy returned to growth in the second quarter, albeit at just 1.36% year-on-year.

The central bank will announce its revised forecast for 2023 GDP growth on Thursday, along with its initial expectations for 2024.

In June, the central bank cut its forecast for this year to an expansion of 1.72% from an earlier prediction of 2.21% in March.

(Poll compiled by Milounee Purohit, Veronica Khongwir, and Carol Lee; Reporting by Faith Hung and Liang-sa Loh; Additional reporting by Emily Chan; Editing by Ben Blanchard and Varun H K)