Policy rate hike looms in Taiwan: UBS

That's amid 4.2% GDP growth forecast.

According to UBS, cyclical recovery has become more evident in Taiwan. Real GDP accelerated to a better-than-expected 3.7%y/y in 4Q12 (3Q at 0.7%y/y), driven by the rebound in exports. 

UBS adds, while the market is generally expecting the CBC to stand pat until late 2013, we believe the CBC could resume gradual interest rate hike, as early as in 1H13. The CBC has since 2H11 been on the sidelines, keeping policy rate unchanged at 1.875%. 

Here's more:

UBS adds, in a nutshell, having incorporated the better 4Q GDP data, we revised up our 2013 growth forecast to 4.2% (old: 3.7%) by keeping our sequential path for 2013 unchanged.

Seasonally adjusted, the economy grew 1.8%q/q in 4Q12, the highest sequential growth since 1Q11.

The most recent January activity data—while distorted upwards by the shift in the timing of the Chinese New Year holiday—also come in better-than-expected and point to continued steady improvement.

At around 4%, the cyclical recovery in 2013—the sustainability of which nevertheless still contingent on a stabilizing Europe and recovering Chinese demand—will remain modest. 

We have argued since late last year that a better domestic economy, plus the receding external event risks, will be the key catalysts for the CBC (Taiwan’s central bank) to shift from a neutral to a moderately tighter stance in 2013.

The recent data therefore adds more conviction to our view that the CBC could tighten earlier than expected. 

Despite a technical recession in 2H11 and the well below trend growth in 2012, the CBC was reluctant to cut rates. This, in our view, illustrates a strong bias by the CBC to normalize the ultra low interest rates when opportunities arise