MAS surprises with no change in monetary policy

MAS surprises with no change in monetary policy

SINGAPORE - UOB today released a flash note on MAS' monetary policy statement. Below is the full report:

The MAS today maintained its monetary policy of a "modest and gradual appreciation" of the SGD NEER policy band, as concerns were biased slightly more towards current and expected inflationary environment than economic growth risks. There will be no change to the slope and width of the policy band, as well as the level at which it is centered.

The inertia was a surprise as consensus has been looking for a slight easing in the policy slope given the headwinds of Eurozone debt crisis and global growth concerns, especially after the IMF's recent reduction in their global growth expectations for this year and next, citing "alarmingly high risks of a steeper slowdown".

Such an unexpected hawkish stance contrasts with the dovish bias we observe across central banks in the developed world, further adding evidence that Asian central banks are yet to move in a synchronized manner in terms of policy response.

Inflationary environment to continue in 2013

In their policy statement, the MAS continued to place a heavy emphasis on the elevated inflationary environment than slowing growth prospects. Within that, imported inflation was of less worry compared to domestically-related inflation such as:

1. a tight labour market and weak productivity growth driving up wages in 2013, translating to higher unit labour costs;

2. elevated owner-occupied accommodation costs (from imputed rentals);

3. high private road transport costs, mainly due to higher COE premiums.

The MAS expects headline inflation to remain elevated in 4Q 2012 and 1Q 2013 due to the above-mentioned reasons while cautioning on possible temporary spikes in food prices due to weather-related disruptions.

As such, full year headline inflation is expected to come in "slightly above 4.5%", before easing to 3.5-4.5% in 2013; while core inflation will average 2.5% this year and 2-3% in 2013.

Our take is that since owner-occupied accommodation and car prices account for slightly more than half of the elevated headline inflation, the use of the exchange rate mechanism will do little to curb these two CPI segments.

We believe that the Singapore government will deploy other administrative measures to address housing, transport, and labour costs.

2Q GDP revised upward, while 3Q GDP came in weaker

Singapore narrowly averted a technical recession as 2Q GDP was revised upwards from -0.7% q/q saar to +0.2% (in y/y terms, 2% to 2.3%).

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