Taiwan: Low Inflation in Region, Buys Central Bank Time

Taiwan reported lower than expected March inflation earlier today and this solidifies Taiwan's position as a low inflation country in a region that is experiencing higher inflation and prompting central banks to tighten monetary conditions. Malaysia and India have already hiked rates. Through increases in the required reserves and administrative measures, China's monetary conditions are not as accommodative as they had been.

Taiwan's CPI stood at 1.27% above year ago levels in March. Only the city-states of Hong Kong and Singapore have lower inflation than Taiwan in the region. The March reading in Taiwan was lower than the 2.35% seen in Feb and lower than the consensus forecast of just less than 2%. Seasonal decline in clothing and leisure helped produce the nearly 1% decline on the month.

Even the headline reading may exaggerate the price pressures in Taiwan. Taiwan, for example, imports nearly all of it energy needs. Rising oil prices pushes up transportation costs in Taiwan. Taiwan's core rate, which excludes fruit and vegetables, fish, and energy rose 0.11% in March. Wholesale prices also catch the increase in energy prices and are up 6.6% year-over-year in March. Rising energy prices may look inflationary, but it is really more a case of relative price changes not general prices.

Rising wholesale prices relative to consumer prices may suggest the risk of margin compression. The data were reported after the stock market closed, but it did tack on 0.8% today and is now up almost 15% from the early Feb lows. The stock exchange reported foreign investors purchased about $575 mln worth of Taiwan shares today, which is more than a third of the year-to-date purchases.

This helped lift the Taiwanese dollar to new 19-month highs. The US dollar can trend toward TWD31.00 from the current TWD31.66.

A rate hike may become more likely after mid-year, but in the mean time, Taiwan's central bank is likely to mop up the surplus liquidity from during the crisis. Today, for the first time since Sept, the central bank sold 1-year CDs (TWD100 bln or ~$3.2 bln) at 0.745%.