Singapore: MAS should retain neutral policy as downside risks rise – BBH

Analysts at BBH point out that Singapore’s central bank meets next week, and markets are somewhat split as most analysts look for tighter policy, but BBH believes that growing downside risks warrant a delay until the October meeting.

Key Quotes

“The economy is slowing.  GDP growth is forecast by the IMF at 2.6% in 2018, down from 3.6% in 2017.  GDP rose 3.6% y/y in Q4, down from 5.5% in Q3.  PMI readings remain firmly above 50.  However, with other indicators suggesting that a regional slowdown is under way in Q1, we see some downside risks to the growth forecasts.  This is also underscored by rising tensions that could impact global trade flows.”

“Price pressures remain low, with CPI inflation at 0.5% y/y in February.  This was likely distorted higher by the timing of the Lunar New Year, and so inflation is likely to fall back in March.  While the MAS does not have an explicit inflation target, limited price pressures supports the case for steady monetary policy.  Note that the MAS runs monetary policy by adjusting the width, slope, and/or midpoint of an unspecified trading band around its nominal effective exchange rate (S$NEER).”

“The MAS last eased in April 2016 by moving to a neutral policy of zero appreciation of its S$NEER.  Since then, the economic outlook has improved and the MAS modified its forward guidance slightly at the October 2017 meeting.  It wrote that “MAS had indicated in the October 2016 MPS that the neutral policy stance would be appropriate for an extended period. Given the economic outlook at this stage and consistent with medium-term price stability, MAS will maintain the rate of appreciation of the S$NEER policy band at zero percent.” 

“Despite dropping the placement of “an extended period” at the end of this last statement, we believe MAS will keep policy on hold when it meets next week.  According to Bloomberg, the MAS will announce its policy decision between April 8-13.  While it is a close call with a chance of a hawkish surprise, we think it’s too early to tighten.  The MAS should play it cautious and keep policy steady now, putting off a decision to tighten until the October meeting.”

“The Singapore dollar remains in the middle of the EM pack.  In 2017, SGD rose 4% vs. USD and compares to the worst performers TRY (-3%) and PHP (-1%) as well as the best ones MXN (+11%) and KRW (+8%).  So far in 2018, SGD is up 2% and compares to the worst performers ARS (-8%) and TRY (-5%) as well as the best ones MXN (+8%) and COP (+8%).  Our EM FX model shows the Singapore dollar to have VERY STRONG fundamentals, and so it should start to outperform more.”