Food inflation in Taiwan is likely to reach a four-year high this month after a typhoon damaged crops this week, further limiting the central bank’s ability to cut interest rates even as economic growth weakens.
Typhoon Saola caused about T$220 million ($7.3 million) in agricultural losses, threatening to push up food prices, which with a weighting of 25 percent are the second largest component in Taiwan’s consumer price index.
That further complicates the dilemma facing Taiwan’s central bank ahead of its September quarterly policy meeting, as it balances its traditional focus on price stability and controlling inflation with the need to help an economy that surprisingly contracted in the second quarter from a year earlier.
“What’s also important is how the central bank sees inflation after July and August,” said Tony Phoo, economist at Standard Chartered in Taipei, who sees food inflation reaching a four-year high of 5 percent to 6 percent in July and staying elevated in August.
“With electricity price rises in the second half, inflation doesn’t have much room to fall, and so, though exports are weak, the central bank does not have much opportunity to cut rates.”
The government raised its inflation forecast for this year to 1.9 percent earlier this week, close to the central bank’s comfort line of 2 percent.
Most economists see the bank still keeping its focus on inflation at the September meeting and leaving rates on hold at 1.875 percent, though talk has grown of a December cut should the external environment weaken further.
It had warned at its last policy meeting in June that inflation needed to be watched, but has been guiding overnight rates lower in recent weeks in an attempt to cushion the economy from falling demand for its exports, the main driver of growth.
That decline in demand pushed the economy into a contraction in the second quarter, against most forecasts for a slight rise, and the government cut its full-year growth forecast for a seventh straight time.
Taiwan is one of the most exposed among Asian exporting economies to fluctuations in overseas demand, particularly for high-tech items. ($1 = 29.9660 Taiwan dollars)