MAS stands pat with neutral monetary policy stance

MAS stands pat with neutral monetary policy stance

SINGAPORE: The Monetary Authority of Singapore (MAS) on Friday (Oct 13) kept its exchange rate-based monetary policy unchanged at its semi-annual review, in line with expectations.

This comes despite advance estimates from the Ministry of Trade and Industry (MTI) showing the Singapore economy growing at 4.6 per cent year-on year in the third quarter, faster than the 2.9 per cent growth in the previous quarter.  

In its statement, the central bank said it will maintain the rate of appreciation of the S$NEER (Singapore dollar nominal effective exchange rate) at zero per cent. The width of the policy band and the level at which it is centred will be unchanged, it added.

The MAS said the Singapore economy has performed "slightly better than envisaged" since its policy meeting in April, while inflation has kept well within expectations. It expects full-year GDP growth to come in at the upper half of the 2 to 3 per cent forecast range.

For 2018, the Singapore economy is likely to expand at a steady but slightly slower pace.

Core inflation – a major policy consideration for the MAS – is expected to be broadly stable throughout next year though it could trend upwards to average slightly below 2 per cent over the medium term, MAS said.

Last April, the central bank unexpectedly flattened the slope of the band it uses to guide the local currency against an undisclosed trading basket, reducing the rate of appreciation to zero per cent.

Prior to Friday’s policy meeting, most economists had expected MAS to stay the course on its neutral policy stance but there were some who thought the central bank could tweak its dovish "extended period" forward guidance – a phrase that it first introduced last October and reiterated in April.

However, MAS on Friday included a reference to its October 2016 statement, which said the neutral stance "would be appropriate for an extended period". Together with its predictions for economic growth and core inflation, “the surprise was how dovish the MAS statement read”, said OCBC’s head of treasury research and strategy Selena Ling.

“All these essentially reinforces that there is no need to jump the gun on tightening now, even as it leaves the adjustment window open in 2018,” Ms Ling added.

Nomura economist Brian Tan agreed, noting that the central bank is “not in a hurry to tighten” given that uneven growth remains in the Singapore economy.

While the manufacturing sector has continued to log outstanding growth, thanks largely to electronics makers, the recovery in other segments has been less convincing.

"It is hard for MAS to justify tightening when a slew of other indicators, like the labour market data, remains weak,” Mr Tan told Channel NewsAsia. “Unless we get a notable pick-up in economic data outside of manufacturing, they are not in a hurry to tighten, not even in April 2018.”

Mizuho Bank's senior economist Vishnu Varathan described the central bank’s decision to stay the course as “well-justified” given that “the jury remains out” on the trickle-down effects from a robust manufacturing sector.

In addition, the S$NEER trending in the upper half of the policy band has translated into “some kind of measured tightening”. “This has bolstered the case for MAS to not rush into making a move,” he said. 

Still, the central bank could be ready to normalise policy at its next meeting in April if Singapore’s economic growth continues to hum along and external factors, such as China’s economy and the US Federal Reserve’s gradual path of policy normalisation, do not trigger unnecessary shocks.

And when it does, Mr Varathan expects MAS to do so in a “calibrated approach” by shifting to a “slight appreciation bias”.

“Unlike previous instances, we did not go into a recession when the appreciation bias was removed in April. So, the depth and breadth of the recovery has not been as accentuated and this gels with a calibrated reinstatement of maybe a 0.5 to 1 per cent annualised appreciation as its first step.”

OCBC's Ms Ling said the window for any monetary policy adjustment remains open next year, "depending on how the economic and price stability picture evolves over the next six months, especially with the G7 central banks increasingly jumping on the policy normalization bandwagon".

Editor's note: A previous version of this story quoted MAS as saying in its latest statement that the neutral policy stance would be appropriate for an extended period of time. This is incorrect. The statement was made in its October 2016 monetary policy statement. 

Source: CNA/sk