S’pore may keep rates unchanged

Central bank in no hurry to tighten policy as inflation remains subdued

SINGAPORE: Singapore’s central bank is expected to keep its monetary policy settings unchanged at its October review, and is seen in no hurry to tighten as inflation remains subdued even as economic growth has picked up pace in the first half.

Sixteen of 17 analysts in a Reuters survey conducted from Monday through yesterday predicted the Monetary Authority of Singapore (MAS) would keep its exchange rate-based policy steady at its semi-annual review, due in October. One analyst expects the MAS to tighten.

“We believe the MAS would require more evidence of a broader local economic recovery, a reversal of soft labour demand conditions and signs of upside pressures on core inflation,” said Craig Chan, global head of EM FX strategy for Nomura.

Singapore’s economy grew 2.7% in the first six months of 2017 compared to the same period a year earlier, outpacing the 2% growth rate recorded during the whole of 2016. Core inflation, however, slowed to a five-month low of 1.4% year-on-year in August, in a sign that demand-led price pressures remain dormant.

The MAS manages monetary policy by changes to the exchange rate, rather than interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed policy band based on its nominal effective exchange rate.

It can adjust policy by changing the appre- ciation rate, mid-point, or width of the Singapore dollar’s policy band.

The MAS kept policy unchanged at its previous review in April, when it maintained the policy band’s appreciation rate at 0%. It also reiterated the forward guidance it introduced last October, saying a “neutral” policy stance is appropriate for an “extended period”.

Five analysts said they expected the central bank to remove or tweak its forward guidance, in a nod to improving growth prospects. Eight others predicted no change.

Among those expecting no policy change in October, 11 analysts said the central bank could tighten next year, while three others predicted the MAS would keep policy on hold even in 2018. Not all are convinced that the MAS is heading toward a policy tightening.

Jason Daw, head of EM strategy for Societe Generale, sees a 70% chance of MAS policy easing over the next one to two years.

“Economic growth is being constrained by a number of factors. These include the debtto-service ratio for consumer borrowing; slower growth in foreign labour that is reducing potential output and wage growth; and housing market policies that keep investment soft,” Daw wrote in a research note.

Against this backdrop, economic growth is likely to remain at around 1%-3%, and policy would need to be adjusted if growth in the United States or China started to slow, Daw added.