SINGAPORE: The Monetary Authority of Singapore (MAS) will likely stand pat on its exchange rate-based monetary policy this month, most economists told Channel NewsAsia ahead of the central bank’s final scheduled policy review for the year.
While the outlook for the Republic remains dim amid global headwinds, the situation does not seem dire enough to justify further easing, these experts said.
“Things are not great but they seem more like different shades of dull, instead of flashing warning lights,” said Bank of Singapore’s chief economist Richard Jerram, adding that the city-state is likely to see gross domestic product (GDP) figures between 1.5 and 2 per cent this year.
Even with the latest official data indicating a rising unemployment rate, Mr Jerram did not think the “slight deterioration in the labour market” would “make alarm bells ring”. “So I think MAS will leave policy unchanged,” the veteran economist added.
Singapore’s GDP held steady at 2.1 per cent in the second quarter, but analysts largely foresee dimmer prospects in the final six months of 2016 amid additional uncertainties due to Brexit. As such, the Government in August shaved its full-year growth forecast to between 1 and 2 per cent, while Deputy Prime Minister Tharman Shanmugaratnam cautioned last week that the local economy will be "in for a tough period that will last for a while”.
The MAS, which manages the economy through the currency rather than setting interest rates, had eased policy earlier in April by flattening 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.
Given the pre-emptive action taken at its previous meeting, Singapore’s economic conditions would need to “worsen much more” in order for the central bank to ease further by shifting the policy band lower, reckoned Nomura Singapore's economist Brian Tan.
“When MAS eased in April, that was based on expectations that things won’t be as buoyant as before. The key question now is whether what we’ve seen over the past few months has been worse than what MAS was expecting,” Mr Tan said. “Our view is no.”
Even the initial fears surrounding the outbreak of Zika have eased, with the virus' related economic impact proven to be “marginal”, the economist added.
Meanwhile, BNP Paribas’ economist Philip McNicholas went as far to say that policy easing “risks doing more harm to the real economy than good”.
“Easing policy via a re-centering of the Singapore dollar’s nominal effective exchange rate (S$NEER) lower may boost export earnings but does little to address the underlying problem of weak final demand,” according to the note dated Sep 26.
“Furthermore, in response to MAS easing, domestic borrowing costs may rise as foreign investors seek greater yield compensation to offset lost potential forex gains against a backdrop of reliance on wholesale funding by the domestic banking system.”
Apart from domestic factors, the MAS may also be inclined to retain its current policy stance amid the looming prospect of an interest rate hike in the United States.
Rajiv Biswas, Asia-Pacific chief economist for IHS Markit, expects the Federal Reserve to finally raise rates in December amid consistent job growth. With further Fed tightening likely to increase debt service for mortgage holders and business owners, as well as stir up uncertainty in emerging markets, Mr Biswas said he believes that yet another easing move from the MAS would yield little results.
However, there are economists who think otherwise.
Dutch bank ABN Amro expects the Singapore central bank to announce a downward shift in its policy band by 0.5 to 1 per cent this month, in a bid to “signal that further strength in the Singapore dollar is unwelcome”.
Factors that pave the way for further easing include strength in the S$NEER which has been weighing on both import and export prices, worsening conditions of the labour market and predictions of slower wage growth in the coming months, said the Sep 28 note from ABN Amro bank.
In addition, the pick-up in MAS core inflation will likely be restrained by weak external price outlook, subdued economic growth prospects and the reduction in labour market tightness.
“The recovery in core inflation has stalled around 1 per cent since May this year. Core inflation needs to rise substantially to 1.3 per cent from September to December in order for MAS core inflation forecast to materialise,” ABN Amro analysts wrote. “In our view, this is ambitious given that domestic growth is projected to slow in the second half of this year.”
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