DBS Forecasts Mild Taiwan Tightening, Shifts TWD Calculus

DBS expects Taiwan’s central bank to embark on a mild tightening cycle during the second half of 2025. The call marks a departure from the prevailing assumption that the monetary authority would hold rates steady through the year. For the Taiwanese dollar, the forecast resets the trade through the lens of narrowing interest rate differentials.

Taiwan’s policy rate has remained unchanged since March 2023. Over that stretch the US Federal Reserve delivered multiple rate increases, widening the yield advantage for the dollar and contributing to persistent depreciation pressure on the TWD. A shift toward tightening in Taipei would begin to close that gap, altering the relative appeal of carry trades and hedged positions that have dominated the pair.

DBS Flags Second-Half Tightening

The bank’s view, released in a note on Monday, describes a “mild tightening path” commencing in the latter half of the year. DBS did not attach a specific magnitude or meeting date to the call. The framing, however, points to a sequence of modest rate adjustments rather than a one-off move, driven by a combination of domestic inflation stickiness and the need to manage capital outflows.

Taiwan’s central bank has historically moved cautiously relative to regional peers. A mild cycle would likely mean incremental adjustments, possibly starting at a quarterly meeting. The call shifts the distribution of outcomes away from a prolonged pause, forcing traders to price some probability of higher local rates over the next six months.

Yield Differential Mechanics and TWD Path

Currency markets price the spread between two economies’ short-term interest rates. When Taiwan’s rate was static and the US rate was rising, the spread moved decisively in favour of the greenback. TWD-denominated assets became comparatively less attractive, encouraging the build-up of short TWD positions.

A tightening cycle in Taiwan would reverse part of that dynamic. Even a shallow rate-increase path, if combined with a Fed that is closer to ending its own cycle, compresses the differential. The compression can trigger a swift repricing in spot TWD, particularly if speculative short positioning has become extended. Traders tracking positioning shifts can monitor the weekly Commitments of Traders data for signals on TWD futures, available through weekly COT data.

The second-order effect matters as well. A firmer TWD helps contain imported inflation, which lessens the need for aggressive tightening and can create a self-reinforcing loop. The risk lies in Taiwan’s heavy reliance on exports: a weakening global demand picture could push the central bank to delay any normalization, thereby removing the currency support.

Central Bank Meetings Set the Calendar

The next concrete decision points fall in the third quarter and again late in the year. The bank typically holds four quarterly meetings. A move could materialize as early as September if second-quarter inflation data prints above the upper bound of the central bank’s comfort zone. A delay into December remains possible should trade data deteriorate or financial conditions tighten too quickly.

TWD traders will monitor Taiwan’s consumer price index and export orders as leading inputs. A sustained rise in core CPI would validate the DBS tightening thesis. Conversely, a sharp slowdown in semiconductor demand would argue against it, given the island’s exposure to the tech cycle.

The DBS call on its own does not guarantee a trend change in the currency. It does, however, sharpen the catalyst path and re-weight the risks that traders need to carry. The bearish consensus that held throughout the Fed hiking cycle now faces a counter-narrative that has a clear timeline, a specific institutional source, and a measurable trigger sequence.