MAS keeping policy steady in Oct despite low low core inflation

SINGAPORE - Singapore's central bank is expected to keep monetary policy steady at its next policy review in October, with core inflation expected to recover from five-year lows and edge higher later this year.

The Monetary Authority of Singapore in January eased its exchange-rate based monetary policy in an unscheduled policy statement, saying the inflation outlook had "shifted significantly" due to a collapse in oil prices.

Analysts say a repeat of such an off-cycle easing is unlikely for the rest of 2015, since both headline and core consumer inflation are likely to inch higher later this year, due to factors such as a stabilisation in oil prices and wage cost pressures from a tight labour market.

Coupled with the fact that full-year economic growth is seen likely to be in line with the government's 2-4 per cent forecast, most economists expect the MAS to stand pat on policy for the rest of the year.

Thirteen of 14 analysts polled by Reuters said they now expect the MAS to leave its policy settings unchanged in October, when it holds its last scheduled policy review for 2015.

"They seem to be still somewhat concerned about inflation picking up later on in the year because of the tight labour market," said Chua Hak Bin, head of emerging Asia economics for Bank of America Merrill Lynch in Singapore.

"So unless growth really surprises quite a bit on the downside, the message we're getting is that they seem to be quite content with where their policy stance is," he said.

The MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (NEER).

In April, at the first of its twice-yearly regular policy reviews, the central bank maintained its policy of a "modest and gradual" appreciation of the Singapore dollar, keeping the slope, width and mid-point of the policy band unchanged.

The April monetary policy statement sent a "strong signal" that the MAS is focusing on medium-term prospects for inflation, said Bill Diviney, regional economist for Barclays in Singapore.

"Given continued tightness in the labour market, we expect MAS to look through the recent fall in inflation, which is largely administrative in nature," Diviney said.

Singapore's annual core consumer inflation rate eased to a five-year low of 0.1 per cent in May as services inflation moderated due to budgetary steps such as a reduction in the foreign domestic worker levy for some households.

The headline consumer price index, meanwhile has declined from a year earlier for seven straight months, weighed down by falls in housing rents and the prices of car permits, as well as the impact from last year's slide in global oil prices.

Still, the 2015 average of core CPI - which excludes changes in the prices of cars and accommodation and is the focus of central bank policy - is now around 0.8 per cent, within the MAS forecast range of 0.5 per cent to 1.5 per cent.

The forecasts for full-year core inflation from economists polled by Reuters ranged from 0.5 per cent to 1.2 per cent.

As long as wage cost pressures remain, the MAS is unlikely to shift to a policy of zero per cent appreciation of the Singapore dollar NEER, said Brian Tan, an economist for Nomura in Singapore.

"The wage pressures are still there, it's just that it's not showing up in the consumer prices. So if that's the case, some degree of appreciation has to be there, it can't be zero."

Although Singapore's total employment contracted for the first time in nearly six years in the first quarter, other gauges point to a still tight labour market.

The seasonally adjusted unit labour cost index of the overall economy rose to 115.4 in the first quarter, the highest going back to 1980.

BIG STIMULUS STEPS UNLIKELY

Economists said Singapore authorities were unlikely to unveil any major economic stimulus this year unless there is a sharp deterioration in growth.

"Usually the big stimulus comes in recession periods," said Leong Sook Mei, ASEAN head of global markets research for the Bank of Tokyo-Mitsubishi UFJ.

Instead, some economists said authorities may unwind some of the property-cooling steps adopted over the past few years.

Some macro prudential measures such as the additional buyer's stamp duty on some property purchases could be unwound, at least for Singaporeans, "to give the housing market a boost and try and help consumption a bit," said Joseph Incalcaterra, an economist for HSBC in Hong Kong.

Such policy unwinding could take place in the second half, possibly in the fourth quarter, he added.