'Worst has passed’ for Singapore economy but MAS in no rush to shift policy: Analysts

'Worst has passed’ for Singapore economy but MAS in no rush to shift policy: Analysts

The central bank remains wary of subdued inflation and a still-weak labour market, economists say.

SINGAPORE: The country’s economic data may have perked up of late but the Monetary Authority of Singapore (MAS) is unlikely to make its next policy move – widely seen as a tightening – at the biannual review this week, said economists.

That is because the central bank remains wary of subdued inflationary pressures and softness in the local labour market. As such, most economists think the MAS will opt to keep its powder dry for now.

Rather than setting interest rates, the MAS manages the economy through the currency by allowing the exchange rate to 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 Sing dollar.

At its previous meeting in April, the central bank, which meets twice a year, said it would maintain a neutral policy stance for an “extended period”.

This comes despite a turnaround in Singapore’s growth numbers this year. Thanks to an improving global economy, the manufacturing sector has outperformed since the final quarter of 2016, benefiting some trade-related sectors and helping to lift overall growth.

However, this will unlikely be enough to nudge the MAS into tweaking its exchange-rate based policy this week, most economists said.

One key factor is the lack of a convincing recovery in the broader economy, with strength coming “only from pockets of Singapore’s economy”, according to UOB economist Francis Tan.

Beyond key growth segments in the manufacturing sector such as semiconductors and precision engineering clusters, Mr Tan noted that growth in other clusters including the offshore and marine, continued to be limp.

Domestic consumption and investment also remained weak. In particular, the latter’s 7.3 per cent year-on-year decline over the second quarter “nearly rivals the weakness last seen during the Global Financial Crisis” – a fall of 7.7 per cent in the fourth quarter of 2008.

“Real GDP growth is only showing the first signs of green shoots. It is better to err on the side of caution and for monetary and fiscal policies to remain accommodative,” Mr Tan added.

Also citing weak private consumption and investment, HSBC’s chief ASEAN economist Joseph Incalcaterra said: “The cyclical recovery appears convincing... however, when we dig a bit deeper, it becomes clear the economy is far from firing on all cylinders.”

This suggests that any recovery in the labour market will likely be “very gradual”. “In short, the worst has passed for Singapore. But MAS is in no rush. We forecast a return to a gradually positive slope in the first quarter of 2018,” added Mr Incalcaterra.

Meanwhile, core inflation – a major policy consideration for the MAS – remains contained within the central bank's official parameters of 1 to 2 per cent, said OCBC’s head of treasury research and strategy Selena Ling.

As such, the central bank is likely to leave its policy stance unchanged in October but “leave (the) door open in 2018, awaiting core inflation cues”.

Nonetheless, there are a handful of economists who think otherwise.

Mr Saktiandi Supaat, head of FX research at Maybank Singapore, thinks there is “little need” for the MAS to maintain its neutral policy stance given that economic growth is “humming along with potential downside growth risks easing”.

A delay in normalising policy could see the central bank having to play catch-up and tighten even more aggressively, he reasoned. The October meeting could be “an opportune time” for the MAS to normalise its policy and shift to a “slight appreciation bias”.


The policy decision from MAS is expected to be released alongside third-quarter GDP advance estimates.

In a note released on Wednesday (Oct 10), DBS economists said there could be a “pleasant surprise” of 4.8 per cent year-on-year growth, up from 2.9 per cent in the previous quarter, with “another stellar performance” from the manufacturing sector on the cards.

On a quarter-on-quarter, seasonally adjusted annualised basis, the economy could expand 7.3 per cent during the July to September period, accelerating from 2.2 per cent in the second quarter.

While the pick-up in GDP shows that recovery is broadening out, DBS noted that third-quarter figures could be the strongest set of growth data this year.

“Growth could ease a tad in the coming quarters as the economy shifts from a recovery to a normalisation phase. Moreover, it is only logical to expect growth to moderate against the backdrop of a normalisation in global monetary policies," wrote DBS economists, who added that GDP growth is expected to come in at 2.8 per cent this year before softening to 2.5 per cent in 2018.

Source: CNA/sk