Taiwan Dollar: CBC inflation risks support against US Dollar – Commerzbank

Commerzbank’s report on Taiwan notes that stronger inflation, with core CPI at 2.5%, is likely to push the CBC towards a more hawkish stance, including a possible 12.5 bp hike in H2. Despite robust AI-driven exports and firm domestic demand, USD/TWD has risen to 32.19, though analysts expect a potential pullback once seasonal dividend outflows fade.

Hawkish CBC and AI-led growth

"Taiwan's June inflation surprised on the upside, with headline CPI rising to 2.6% yoy from 2.2% in May. This was the fastest pace since January 2025 and well above the Central Bank of the Republic of China’s (CBC) informal 2% threshold. Higher fuel, gas and electricity costs were the main drivers, but services inflation remained firm at 2.9% vs 2.5% previously."

"While lower oil prices should help moderate headline inflation in the coming months, the pickup in core inflation will be a concern for CBC. It strengthens the case for CBC to turn more hawkish. CBC last hiked the policy rate by 12.5 bp to 2% in March 2024 and has kept it there since. We could see a 12.5bp hike in H2 this year. The combination of AI-led income gains, strong domestic demand, and persistent services inflation gives CBC less scope to look through temporary energy-driven price pressures."

"Despite the strong economic performance, TWD remains on the backfoot with USD/TWD back towards the high for this year. Net seasonal dividend outflows have weighed on TWD, but once this fades, we could see a pullback in USD/TWD."