SINGAPORE: Even with inflation nudging up, the Monetary Authority of Singapore (MAS) will be in no hurry to tweak monetary policy when it holds its semi-annual meeting next month, economists said.
This is because the Singapore economy, which marked its worst ever recession in 2020 due to the COVID-19 pandemic, remains on the path of a slow and patchy recovery, they added.
Instead of setting interest rates, the MAS manages the economy through the currency. It lets the exchange rate float within an unspecified policy band, and changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the Singapore dollar.
At its last policy review, the central bank said it would “maintain a zero per cent per annum rate of appreciation of the policy band”, standing pat after two consecutive rounds of easing. It added that its accommodative stance “will remain appropriate for some time” with core inflation set to remain low.
Official data released last week showed core inflation – a key indicator that the MAS uses to guide monetary policy – turning positive for the first time in a year as the costs of food and services rose. The measure, which strips out more volatile indicators like accommodation and private transport, rose to 0.2 per cent in February on a year-on-year basis, up from the -0.2 per cent registered in January.
Headline inflation, which includes all items, also picked up to 0.7 per cent last month after returning to positive territory at 0.2 per cent in January.
Still, economists think the MAS will hold back on policy shifts.
CIMB private banking economist Song Seng Wun said inflation, while ticking up, remains “fairly mild” compared to pre-pandemic levels.
Besides, the increase is coming off a low base and driven by short-term factors. These include the rise in commodity prices including oil, as well as higher shipping and transport costs due to renewed lockdowns and a global shortage of shipping containers.
“At the moment, the increase in prices is less due to demand pressure building up but supply disruptions and a low base,” Mr Song said.
The economy also continues to see a patchy recovery.
Even though gross domestic product (GDP) for the first quarter of 2021 could see a “marginal return to the black”, Mr Song said this will “mainly be heavy-lifting by a couple of sectors” that have held up amid the pandemic, such as manufacturing. Others, like aviation and services, continue to remain in the doldrums.
“Recovery is still uneven across industries. Even if inflation forecasts are revised upwards, we still see MAS standing pat for now until they are more comfortable with the quality of the recovery,” said Mr Song, who expects first-quarter GDP to end four consecutive quarters of contraction and log “marginal” growth of 0.3 per cent year on year.
READ: Singapore maintains 2021 GDP forecast as economy contracts 5.4% last year, less than advance estimates
Echoing that, Maybank Kim Eng economists said they expect the MAS “to remain patient despite the inflation risks” and maintain a neutral policy at its meeting in April.
“The economic recovery is sluggish and real GDP remains below pre-pandemic levels,” they said.
However, they noted a 30 per cent probability of a tightening in October if inflation overshoots, with the MAS shifting back to a “slightly gradual and modest appreciation stance”.
Barclays Bank economist Brian Tan has written off the odds of further easing by the central bank given how the worst of the pandemic has passed and vaccination programmes are under way. The country’s underlying export momentum also “remains solid” and labour market conditions are improving, he added.
That said, a policy tightening is also unlikely with the resumption of international travel, a “crucial condition for the tightening of forex policy”, still uncertain.
“Our base case is that policy tightening is more likely to begin in April 2022. While we note the risk of an earlier move in October 2021, its probability seems low,” said Mr Tan.
READ: Commentary: Singapore economy set for V-shaped recovery this year but jobs market may take longer to rebound
What will change at the upcoming meeting is the central bank’s expectations for headline inflation.
The authorities have said in its report last week that the 2021 forecast range for headline inflation is being reviewed given the “sharper-than-expected increases in the prices of non-core items”. An update can be expected at the MAS’ monetary policy statement in April.
Economists are expecting the central bank to raise the forecast range, which is currently at -0.5 to 0.5 per cent.
Mr Song thinks this could be an upward revision to 1 to 2 per cent, while economists from Maybank Kim Eng and OCBC are penciling in a new range of 0.5 to 1.5 per cent.
Ms Selena Ling, head of treasury research and strategy at OCBC, said: “This is realistic, given the higher crude oil prices, vaccine-aided recovery and firms potentially passing on higher supply costs … to end-consumers as consumer demand normalises further.”
She added that domestic inflationary pressures have started to emerge in the form of wages and transportation costs in February. This contributed to the increase in selling prices for the first time in over a year since the COVID-19 pandemic began, as business confidence improved and firms moved to protect their profit margins.
“If sustained, this, coupled with the buoyant crude oil prices, could also pose upside risks if a faster growth recovery trajectory materialises,” Ms Ling said, while adding that headline inflation may surpass 1 per cent in the second quarter due to the low base last year before gradually normalising to below 1 per cent by the fourth quarter.