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Following our earlier upward revision of 2026 GDP and CPI forecasts (to 9.4% and 1.9%, respectively), we also revise our interest rate forecast, adding one 12.5bps rate hike in 3Q, which would lift the policy discount rate from 2.00% to 2.125%.
Recent data suggest that the central bank is likely to remain on hold at the June policy meeting. Headline CPI rose from 1.2% yoy in March to 1.7% in April. On a sequential basis, CPI also recorded a notable 0.5% mom increase (sa). The pickup was driven mainly by a 2.1% yoy increase in transportation and communication costs, reflecting partial increases in retail fuel prices amid the surge in global oil prices following the Middle East conflict, despite subsidies provided by state-owned CPC. Core CPI remained relatively stable at 1.9%, suggesting that pass-through into broader goods and services prices has so far remained limited.
Looking ahead, however, tightening pressure is likely to build in 2H as pipeline inflation pressures continue to rise. PPI surged to 8.5% yoy in April, approaching the 14.2% peak seen during the 2022 Russia-Ukraine war. PMI price subindices also rose sharply, with the manufacturing PMI raw material prices index jumping to 87.3 and the services PMI prices paid index rising to 72.3, both close to their respective 2022 peaks of 87.5 and 76.1. These leading indicators suggest that headline CPI could rise above 2% from May onward and reach around 2.5% by mid-year. Some pass-through into core inflation is also likely, potentially pushing core CPI toward 2.5% in 2H.
Taiwan’s central bank remains vigilant against second-round inflation effects stemming from higher energy costs. As reflected in the March MPC meeting minutes, several members highlighted the need to closely monitor public inflation expectations, which could warrant a monetary policy response. Although inflation expectations, as measured by the consumer confidence survey, had not deteriorated sharply as of April, such indicators tend to move coincidently with CPI rather than act as leading indicators. If CPI rises more noticeably from May onward, inflation expectations could also begin to increase. In addition, CPI for frequently purchased items (purchased at least monthly or quarterly) rose more visibly in April, suggesting that consumers are becoming increasingly sensitive to rising prices, which may further reinforce inflation expectations in the coming months.
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