Taiwan's growth recovery remains slow and lagging. In spite of the rebound in Oct export orders, industrial production has picked up only modestly due to cyclical and structural constraints. It is production that drives export shipments and highly correlates with the GDP cycle. Today's data may show that exports have improved only marginally to -10.8% (YoY) in Nov from -10.9% the month before.
On the domestic side, despite the central bank's rate cut and relaxation of home mortgage rules, bank lending growth has remained subdued as of Oct (2.6%). Corporate loans slowed notably due to the cuts in capital spending plans, which offset the modest rebound in consumer loans. Other indicators including consumer confidence and retail sales have continued to deteriorate along with the labor market softened.
Considering that the recovery in exports would be slower than expected in 4Q and the stimulus effects of Sep rate cut on domestic demand are not yet apparent, the central bank will face the pressure to further cut rates at the Dec meeting, by another 12.5bps.
The room for one more rate cut remains. Inflation is a non-worry, in light of a deeply negative output gap, slowing wage growth and sluggish global commodity prices. Capital outflows and currency depreciation caused by unfavorable TWD-USD rate gaps shouldn't be a big worry either, because the current account remains in strong surplus positions and the foreign debt repayment burdens are moderate. In all, Taiwan's central bank should have the flexibility to focus on the goal of supporting growth and to maintain an easing bias on monetary policy.