To tighten or not: Economists split on upcoming MAS policy decision amid trade risks

To tighten or not: Economists split on upcoming MAS policy decision amid trade risks

While rising inflation makes the case for tighter monetary policy, economists say the cycle of retaliatory tariffs between the world’s two biggest economies may prompt the central bank to stand pat.

A view of the Monetary Authority of Singapore
The Monetary Authority of Singapore (MAS) building. (Photo: AFP/Roslan Rahman)

SINGAPORE: As the tit-for-tat tariff spat between the United States and China wages on, economists are split as to what the Monetary Authority of Singapore (MAS) will do when it holds its semi-annual policy meeting next month. 

Half of those that Channel NewsAsia spoke to think the central bank will hold back on policy tweaks while the rest expect further monetary policy tightening, which means allowing for a stronger Singapore dollar. 

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 Sing dollar. 

In April, the central bank slightly increased the slope of the policy band from zero per cent to allow for “modest and gradual” appreciation, while keeping the width and mid-point unchanged – marking its first tightening move in six years.  

However, mounting trade tensions, particularly between the world’s two largest economies, have since fuelled concerns about potential impact on Singapore’s open economy, rendering the move towards full policy normalisation less certain.

The latest salvo was fired early last week when the US announced another set of 10 per cent tariffs on US$200 billion worth of Chinese imports. China has since retaliated by adding US$60 billion of US products to its import tariff list. 

This comes on top of the tit-for-tat US$50 billion levies imposed by both sides in recent months. 

With a lot more consumer electronics items included in the new tranche of US tariffs, Maybank Kim Eng economist Chua Hak Bin reckoned that it will be “very disruptive” to the global electronics supply chain which Singapore is plugged into. 

“Singapore will be caught in any supply chain disruption, alongside others like Hong Kong and Taiwan, and it will definitely be negative,” he said.

Apart from trade uncertainties, the external environment is also seeing bubbling risks in the form of weakening manufacturing indicators and an ongoing turmoil in emerging markets as the US Federal Reserve continues to raise interest rates, said UOB economists Alvin Liew and Francis Tan. 

Domestically, the economy is expected to slow in the second half of 2018 as manufacturing – the main growth booster for the past year or so – loses speed and the effects of recent property cooling measures kick in, economists added. 

Said Dr Chua: “Overall, the growth momentum is waning so it’s probably sensible to maintain status quo for now.” 

However, economists from the other camp think factors, such as rising inflation, still make the case for a tighter monetary policy.

Core inflation – a key factor in monetary policy decisions – rose to 1.9 per cent in July, marking its highest level in nearly four years. 

The economy expanded at a slightly better-than-expected 3.9 per cent in the second quarter from a year ago, after having grown 4.5 per cent in the first quarter.

This means that even as growth moderates during the final six months of 2018, the Singapore economy will still manage a healthy growth pace of 3 per cent for the full year, said OCBC Bank's head of treasury research and strategy Selena Ling.

Meanwhile, trade tensions remain a “slow-burn scenario” that will unlikely cause a “drastic recession story”, she added. 

“Certainly there are dark clouds gathering on the external front but the question is from now until April (when the MAS has its next policy meeting), will there be a severe deterioration in the external risks such that Asia will be tipped into a drastic recession story? I don’t think so.”

READ: With the world ‘moving a little closer’ to a trade war, what’s the impact on Singapore?

Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank, said it remains too early to assess the impact on Singapore. 

Hence, even as trade risks have been elevated of late, the MAS will unlikely hold back on policy tweaks to “pre-empt a negative trade shock” as the “data so far seems consistent with a gradual slowdown”. 

There could even be a silver lining as some trade diversion occurs, said Mr Varathan. Such re-routing of supply chains will most likely take place in Southeast Asia and Singapore firms could be well-placed for opportunities that emerge. 

“Overtime, we will see some re-routing of supply chains with a portion of that going to the rest of Asia, specifically ASEAN. Singapore, being part of ASEAN, will have a lot to gain as we are plugged into the financing and supply channels of the region,” he said. 

Source: CNA/sk(ms)