MAS surprises with no change in monetary policy

PHOTO: 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%).

The revision was due to new data of higher certified progress payments from the private sector industrial and residential projects in the construction sector (2Q construction sector VA revised from 5.3% y/y to 10.1%).

Advance estimates showed that Singapore's 3Q GDP came in at a weak 1.3% y/y (-1.5% q/q saar), mainly held down by the contraction of 3.9% q/q saar seen in the manufacturing sector in line with the global growth slowdown.

Monthly economic growth indicators such as purchasing managers' index, US semiconductor book-to-bill ratio, industrial production, and NODX were all pointing to further downside risks to Singapore's overall economic growth trend in 4Q and well into 2013.

The government is maintaining its growth expectations of 1.5 to 2.5% in 2012, while we maintain our 2012 GDP forecast at 2.0%, with downside risks coming from slower manufacturing activity and lower service sector contributions due to labour market tightness, and slower growth in services exports.

Near-term support for SGD expected

Upon the MAS announcement, the USD/SGD gapped down from 1.2279 to 1.2219, as the status quo policy stance surprised market participants who were expecting a slight lowering of the steepness of the SGD NEER slope.

Although the status quo stance would imply an appreciation bias for the SGD against its major trading partners' currencies, we believe the downside risks of the USD/SGD would be limited by the uncertain global growth environment and bouts of volatility due to risk events from the euro-zone debt crisis. The technical picture of the USD Index also looks supportive of USD strengthening from current levels.

Nevertheless, capital flows into SGD may continue as the SGD remains to be one of the safe-haven currencies in this world amidst the current uncertainties. Despite the inaction from the MAS, we believe that potential risk events on the horizon will translate into a stronger USD and with that, we maintain our forecast of year-end USD/SGD at 1.2400, in line with our expectations of a weaker Euro and Aussie dollar while safe haven flows into SGD will cap the USD/SGD upside barring any unexpected financial shock.