SINGAPORE: Apart from the outlook for inflation and growth, the Monetary Authority of Singapore (MAS) will have something else to mull over when it holds its semi-annual policy meeting this month.
Policymakers will likely be looking at the simmering trade tensions between the world’s two largest economies, which seemed to have moved up a gear as China on Monday (Apr 2) imposed retaliatory tariffs on 128 US products worth US$3 billion. This was in response to the earlier US levies on steel and aluminium imports, and as reports suggest that more US duties targeted at “largely high-technology” Chinese goods could be announced this week.
“Risk is crystallising and words are turning into action,” said Nomura economist Brian Tan. With Singapore being an open and export-oriented economy, the recent tit-for-tat moves, which have fanned uncertainty about the outlook for global trade, is “something that the MAS cannot ignore”, he added.
And some experts think the heightened fears of a trade war could make the central bank pause in its intended path of policy normalisation.
The MAS has been widely expected to shift away from a neutral monetary policy of zero appreciation for the trade-weighted Singapore dollar exchange rate – a stance that it has maintained since April 2016 – this year, in response to improving growth and rising inflation.
Said OCBC Bank’s head of treasury research & strategy Selena Ling: “If you asked me three months ago about the likelihood of (MAS) moving in April, I would say probably yes. But along comes (US President) Trump and his tariffs, everything is now in disarray.”
With Singapore and other Asian countries plugged into the global supply chain for manufacturing and electronics, “it is very hard to draw the line and say there will be no spillover effects”, she added. For one, increasing US-China trade tensions could weigh on business confidence in the near term.
Meanwhile, domestic economic indicators are showing "no immediate urgency” for a policy shift. “The fact is when you look at most of the economic signals, the peak is probably behind us after a fantastic year last year,” said Ms Ling, referring to the manufacturing-led growth spurt that saw Singapore’s economy expanding 3.6 per cent last year.
“I think MAS still wants to tighten policy but maybe not at this juncture,” she told Channel NewsAsia. “Perhaps, they’ll want to wait and see.”
Mr Tan from Nomura echoed a similar sentiment, while adding that he is “sceptical” about further signs of inflation pressures.
Noting that the Chinese New Year may have distorted February’s inflation figures, which showed a rise in core inflation to 1.7 per cent, he said: “I’m looking at full-year inflation to be somewhere around 1.7 per cent for 2018, and slightly lower at 1.5 per cent next year."
Core inflation, which excludes the cost of accommodation and private road transport, is a key consideration for the MAS.
Also expecting no move in the upcoming meeting, ANZ’s chief economist for Southeast Asia and India, Sanjay Mathur said inflation, which has not been showing any material signs of rising, and protectionism fears will have the MAS maintaining the status quo.
He added that the central bank may risk slowing down the recovery in the local economy if it makes a premature move to tighten monetary policy. “Why would you risk having currency strength, which it’s not necessarily needed, when growth is not firing on all cylinders and inflation is still low?”
But other economists, such as Maybank Kim Eng’s Dr Chua Hak Bin, think otherwise.
Firstly, Dr Chua reckoned that China’s retaliatory salvo has been a “measured and very calibrated” response, with the US$3 billion worth of additional tariffs being “tiny in the scheme of things” and largely targeted at farm products.
This means there’s room for negotiation to avoid a full-blown trade war, and that the tit-for-tat countermeasures “would not be a big enough risk” to derail the MAS from normalising policy, he added.
The economist is also expecting first-quarter GDP growth to surpass expectations to hit 4.1 per cent, propped up by the upside surprise in manufacturing. Dr Chua also has a more upbeat outlook on inflation and expects core inflation to continue creeping higher on the back of factors, such as wage pressures.
“A neutral bias is what you keep when you are in a downturn or recession. As things head back to normal, it’s probably time to normalise to a slight appreciation bias,” said Dr Chua.
“There are always risks in this world but on balance, the economy is on a better footing today compared to 6 or 12 months ago. Businesses are also more optimistic and things seem to be stirring in the property market," he added.
"If you delay normalisation, and core inflation goes up to 2 per cent in the coming months which may be possible, you could be seen as falling behind the curve."
BMI Research, a unit of Fitch Group, also anticipates a tightening in the MAS' exchange-rate based policy this month.
An expansionary budget and rising fuel prices will likely place additional upside pressures on inflation, analysts said in a note last month. With growth likely to remain within the Government’s expectations, the MAS will make a policy shift “to ensure that inflation remains within its acceptable range as the stronger Singapore dollar will curb imported inflation”.
And in the event that the central bank does not do so this month, it will likely tighten its policy in October, said BMI Research’s senior analyst Chia Shuhui.