Economists see MAS preference for near-term easing

Singapore

SINGAPORE'S central bank left its monetary policy stance untouched on Friday, but is already hoping for a weaker Singapore dollar which may result in an easing move soon, economists said.

They noted that despite Friday's weak estimates on growth and inflation, the Monetary Authority of Singapore (MAS) chose to leave its neutral policy stance untouched. But it stated clearly its preference for a weaker Singapore dollar nominal effective exchange rate (S$NEER), they argued.

MAS said a neutral policy stance will be "needed for an extended period to ensure medium-term price stability". This allows the S$NEER to "accommodate the near-term weakness in inflation and growth", it added in a statement.

This was a clear sign of a "policy preference for the S$NEER to stay in the weaker half in the near term", wrote Citi economist Kit Wei Zheng.

As such, should weaknesses in inflation and growth persist, there is a high probability for an easing in the coming months, said economists. But they were divided over when that may be. Some said in April, some see later.

There are also those who see an off-cycle surprise easing in January, and others who do not expect an easing at all.

MAS maintains price stability in Singapore by guiding the Singapore dollar against a basket of trade-weighted currencies, through adjusting the currency's pace of appreciation within S$NEER band.

It can do so by targeting either the band's slope, width or level. Should the S$NEER go out of this band, MAS steps in by buying or selling Singapore dollars.

MAS normally issues policy decisions in April and October. It last flattened the band to a zero per cent appreciation path in April this year.

Growth has weakened noticeably since then. Friday's gross domestic product (GDP) data showed that the economy in the three months ended September contracted by a deeper-than-expected 4.1 per cent quarter on quarter, and eked out only a 0.6 per cent year-on-year growth.

Even so, core inflation - a major policy consideration for MAS that excludes policy-sensitive prices of accommodation and private road transport - will still be around one per cent this year. It will be between one and 2 per cent in 2017, but "the ascent will be gradual", wrote MAS.

But even so, economists generally agree that the S$NEER has been fluctuating in the upper portion of the current band as other currencies weakened. This may be a drag on growth and inflation.

UOB's model suggests that since the April flattening, the S$NEER has been trading above the band's mid-point 82 per cent of the time. Hence, Friday's dovish statement sent a strong signal that MAS stood ready to ease. This helped guide the S$NEER lower, Standard Chartered economists suggested. "We believe market expectations of more MAS easing will keep the Singapore dollar under pressure in the short term," they wrote.

This may provide some policy buffer, some economists said. The "implicitly dovish tone of the statement more than compensated the policy hold", wrote Vishnu Varathan, economist at Mizuho. As if to affirm this point, and dragged down by disappointing GDP numbers, the Singapore dollar traded at 1.3917 to the US dollar as at 1.30pm on Friday, Bloomberg data showed. This was a rate not touched in more than seven months.

Foreign-exchange strategists thus recommend traders to maintain their positions on the currency.

Wrote Vaninder Singh, economist at Royal Bank of Scotland (RBS): "We believe it would be prudent to wait for a better entry point than the S$NEER's current position (at the mid-point) to enter short Singapore dollar long basket positions." And when the next easing comes, it will most likely be a downward re-centring, economists said. This is because a flattening, like the one seen in April this year, is "analogous to unchanged policy rates in a typical interest rate based policy regime", Citi's Mr Kit argued.

A downward shift of the S$NEER band will have the effect of a one-time rate cut, he said. Friday's decision to "stand pat thus suggests that downside surprises have not been sufficiently large to sanction outright 'cuts' for now", he added. ANZ economist Ng Weiwen sees this happening earliest in April next year. In the meantime, "we probably will now see more action from the fiscal side to boost growth", he said.

For this year at least, growth is expected to continue. Based on Mr Ng's stress test of a one per cent full-year growth this year, Q4 will likely see GDP expansion. This gives the central bank some breather after it exercised easing moves twice in 2015 and in April this year.

Given that the fiscal budget is expected to be announced around February next year, Mr Ng thinks an easing in or after April 2017 is likely.

Houses that expect an easing next April include Bank of Singapore, RBS and Westpac. Yet, there are some, such as StanChart and UOB, which do not expect MAS easing in April, if at all.

They say that growth outlook is stable and inflation forecasts are higher than those for 2016. It also supports MAS's October view that the band needs to be neutral for "an extended period".

Then there are those who think an off-cycle easing is likely.

This is because with re-centring the band lower taken to be the next easing move, it can be used to respond to adverse economic shocks. Brexit, or when the United Kingdom starts to leave the European Union, is one such example, said Mizuho's Mr Varathan. "Such 'tail risks', being hard to predict but requiring prompt response, keep policy 'live' and possibly off-cycle," he wrote.

Citi's Mr Kit zeroed in on the unusual tone in October's statement to mean a possibility of an off-cycle easing, probably in January. MAS stressed it will closely monitor economic developments which might hint at uncertainties, he wrote.

In addition, the usual sentence that the "policy stance is assessed to be appropriate" was noticeably absent this time round, he added. "This suggest that MAS stands ready to act if the data warrants. Depending on the severity and timing of GDP weakness, we would not entirely rule out a January inter-meeting move."