According to October’s macro data released earlier this week, economic growth remains soft in 4Q and inflation is still above the long-term trend. Exports grew 11.7% YoY in October, seemingly better than 9.9% in September; but primarily driven by the increase in festive demand ahead of the year-end Christmas season. Stripping out the seasonal factors, the value of exports in fact slipped -0.5% from September and its QoQ sequential growth remained negative.

Separately, headline CPI inflation rose 1.2% YoY in October, a slowdown compared to 1.4% in September; while core inflation picked up significantly to 1.5% from 1.2% largely owing to the rise in clothing prices on the back of the surge in gold prices and higher costs of raw materials. WPI inflation also accelerated in October, as the depreciation in the Taiwan dollar against the US dollar raised the costs of imported goods and materials.

In light of the softness in economic growth and the uncertainties in the global economy surrounding the development of the European debt crisis, the central bank in Taiwan will most likely keep interest rates at extremely low levels in the near term. There is no urgency for the central bank to slash rates, as growth is slowing rather than collapsing and inflation remains higher than the long-term trend.

From the perspective of liquidity/capital flow management, the CBC has well maintained the TWD liquidity at accommodative levels through open market operations (reducing the issuance of CDs/ NCDs), despite the external headwinds of large portfolio capital outflows occurred during August-September. We forecast the CBC to leave the benchmark discount rate unchanged at 1.875% during this and the next two quarters until 3Q12.