DBS senior economist Ma Tieying has revised her outlook for Taiwan’s policy rate after upgrading 2026 forecasts for GDP to 9.4% and CPI to 1.9%. She now expects one 12.5bps rate rise in the third quarter, taking the policy discount rate from 2.00% to 2.125%.
Recent data suggest the central bank may keep rates unchanged at the June policy meeting. Leading indicators point to headline CPI rising above 2% from May and reaching about 2.5% by mid-year.
Pass-through into core inflation is expected to continue, with core CPI potentially moving towards 2.5% in the second half of the year. Pipeline inflation pressures are also expected to increase during the second half.
The central bank is monitoring risks of second-round inflation linked to higher energy costs. The article notes it was produced with the help of an AI tool and reviewed by an editor.
We are now looking at a potential 12.5 basis point rate hike in the third quarter, which would take the policy rate to 2.125%. This shift in outlook comes after forecasts for economic growth and inflation were revised sharply upward. The central bank will likely wait through its June meeting, giving us a window to position for this change.
The remarkable 9.4% GDP growth forecast is looking more realistic, especially after we saw April’s export orders jump 22% year-on-year. This surge is almost entirely due to insatiable global demand for advanced AI chips from our leading foundries. It is clear the economy is running hotter than anyone anticipated just a few months ago.
Inflation is no longer a distant threat, with last week’s data showing April’s CPI already at 2.1%. With global oil prices staying firm above $95 a barrel, we expect this to push headline inflation towards 2.5% by mid-year. These numbers support the view that price pressures are building across the board.
This is a different environment compared to what we saw in 2025, when the central bank was comfortable holding rates steady as inflation stayed below 1.7%. The concern now is about second-round effects where higher energy and import costs bleed into wages and services. The central bank appears determined to act pre-emptively this time around.
Given these developments, we should consider positioning for higher short-term interest rates in the second half of the year. This could involve looking at Taiwan Dollar interest rate swaps to pay a fixed rate ahead of the expected hike. The market may not have fully priced in this more aggressive path from the central bank.
A more hawkish central bank policy will likely provide strong support for the Taiwan Dollar. As the interest rate differential with the US dollar potentially narrows, we could see renewed strength in the local currency. This outlook warrants a review of our currency derivative positions for the coming months.
