Economists see MAS standing pat on monetary policy this week

Singapore - The central bank is reviewing its monetary policy stance this week, and the market consensus is for all settings to remain on hold - with no change to the slope and width of the Singapore dollar policy band, nor the level at which it is centred.

This sort of unanimity hasn't happened in quite a while; just a few months ago, sinking oil prices and turbulent financial markets prompted some to warn of the rising risk of an easing stroke by the Monetary Authority of Singapore (MAS).

But the dust has since settled, and most private-sector economists now agree that there is little reason for the central bank to tweak its stance.

"The MAS will not derive appreciable policy mileage from a flatter slope at the April 14 policy meeting. After two flattening moves in 2015, another will amount to needless policy fussing," said Mizuho economist Vishnu Varathan, who, with UOB economist Francis Tan, point out that Singapore is not staring down the barrel of a recession or crisis, thus eliminating the need for any drastic moves.

To Mr Tan, a switch to a flat S$NEER (Singapore dollar nominal effective exchange rate) band is highly unlikely. He said: "We think that the chance of such a move remains small, as it was only done during economic recessions in the past. It will provide too strong a signal where the market thinks that policymakers are pessimistic about aggregate demand growth going forward, and such pessimism may self-perpetuate and hit consumption and investment demand."

There's also the fact that MAS has kept its 2016 core inflation forecast unchanged - even as it lowered its full-year headline inflation projection in February to minus-one to zero per cent (from an earlier range of minus-half to half a per cent).

Said MAS deputy managing director Jacqueline Loh in late-February: "It is important to note that the forecast for core inflation - which is the most relevant indicator for monetary policy - remains unchanged at 0.5 to 1.5 per cent for 2016."

This builds in a very gradual upward creep in core inflation for the rest of the year, with a more discernible uptick from mid-2016 - reflecting the dissipation of some base effects associated with oil price fluctuations and other subsidies' effects. (Core inflation strips out the costs of accommodation and private road transport.)

Economists also say that the expansionary Budget announced by Finance Minister Heng Swee Keat has removed the catalyst for a possible MAS policy change, since fiscal policy will help with the heavy lifting to support gross domestic product (GDP) this year.

"A contractionary fiscal policy stance, while not our base case, would have raised the probability of an exchange rate policy easing move by the MAS in April. These risks did not materialise," said Credit Suisse economist Michael Wan.

Added Mizuho's Mr Varathan: "The upshot is that with global markets (and oil) stabilising, diminished China hard-landing risks and fiscal boost to the tune of one per cent of GDP, the MAS can afford to sit on its hands at this policy meeting."

Still, economists from Citi and HSBC think that the call could be closer than the market thinks. While they foresee the MAS standing pat on Thursday, they flag the risk of a slight slope reduction, due to the weaker wage outlook.

Said Citi's Kit Wei Zheng: "While the slowdown in 2015 job creation was in line with MAS's expectations, job creation for locals was flat, while job vacancies have fallen, though still outnumbering unemployed persons. The recent spike in retrenchments is the clearest sign of cyclical weakness. Thus, MAS now expects wage growth to ease in line with the tepid economic environment, versus October expectations of a pick-up to historical average."

HSBC's Joseph Incalcaterra agreed, saying that the MAS's "recent trend of unorthodox policy moves" - a surprise slope reduction in January 2015 and further calibrated easing in October - suggests that "there is a possibility of another round of calibrated easing", especially given the wage and labour market outlook change.

However, one analyst whose call goes against consensus is DBS's senior currency economist Philip Wee; he believes that there is a case for a flattened slope.

"The purpose of S$NEER appreciation is to control inflation, which the government now expects will be negative for a second consecutive year in 2016 . . . We think there are now sufficient factors - beyond weak low oil prices and low import prices - to consider such a move," said Mr Wee, citing the weak economic outlook and environment of no asset inflation.

But the majority of forecasters disagree. While they acknowledge that headline inflation has remained stubbornly negative, they point out that this is not a cause for a policy response by MAS - because the largest drivers of disinflation are imputed rentals, private road transport, and utility tariffs. The first two are by-products of intentional administrative policy, while the third is a result of lagged effect of global oil prices.

"Core inflation is already ticking higher, and we expect headline inflation to turn positive by end-Q3 this year - barring an unexpected collapse in oil prices. Thus, given the six-month or so lag expected for monetary policy, MAS does not have a compelling reason to ease in April," said Mr Varathan.

The central bank will announce its monetary policy decision on Thursday, April 14, at 8am. The Ministry of Trade and Industry will announce the flash estimates for Q1 GDP growth at the same time.

This article was first published on April 11, 2016.
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