Update: Sing dollar firms against greenback after MAS keeps monetary policy intact

The Singapore dollar firmed against the greenback on Tuesday after the Monetary Authority of Singapore (MAS) kept its monetary policy unchanged.

The central bank kept the Singapore dollar on a "modest and gradual" appreciating path, with no change to the slope and width of the policy band and the level at which it is centred.

"The immediate reaction to this surprise was most evident in the USD/SGD weakening to 1.363 from 1.373,'' said Nicholas Teo, market analyst at CMC Markets Singapore.

Before the MAS announcement, the currency weakened to 1.3746, compared to the previous close of 1.3714.

DBS economist Irvin Seah noticed that the MAS policy announcement was accompanied by a more upbeat rhetoric.

"The MAS statement upgraded the assessment of the global economy to "improved slightly" from uneven and mixed in the 28 Jan statement. Even so, there was no change to the 2-4% growth forecast for 2015.''

Early Tuesday, the Ministry of Trade and Industry (MTI) also announced that the Singapore economy grew by 2.1 per cent on a year-on-year basis in the first quarter of 2015 based on advance estimates, the same rate of growth as that achieved in the previous quarter. On a quarter-on-quarter seasonally-adjusted annualised basis, the economy expanded at a slower pace of 1.1 per cent compared to the 4.9 per cent in the preceding quarter.

Jonathan Cavenagh, senior FX strategist, Westpac, Singapore told Reuters that the MAS appears to be counting on a few things to drive an improvement in the outlook - better global growth, particularly from the G3 and a pick-up in oil prices in the second half of this year.

"This latter point will boost oil related services and inflation. At the same time, the labour market is expected to remain tight largely due to supply constraints. Hence if growth momentum does improve there is a risk inflation pressures turn higher.''

"These factors seem to be the main rationale for today's no change stance. I would generally see downside risks to this view, with core inflation pressures remaining muted and domestic demand quite soft, with pass through from the tight labour market remaining limited. This creates the risks of a easing at the next meeting in October or another inter-meeting move."

Sean Yokota, head of Asia strategy, SEB Singapore, said the move was a surprise: "They may want to reduce volatility by keeping policy stable since they set policy based on NEER. USD/SGD can still rise as long as other Asian currencies weaken. They'll have to act in October and loosen."

OCBC's economist, Selina Ling said:"We still look for full-year 2015 growth at 2.5 per cent, which is at the lower end of the official 2-3 per cent forecast, with headline and core inflation forecasts intact at 0 per cent and 1 per cent yoy respectively.''

Inflation seems to be falling within the target range set out by the MAS, UOB's economist, Francis Tan, said.

"So as of now, I don't see anything in the dashboard. But coming up further, if oil prices were to go down substantially I will say then the MAS will be pressured to ease or to lower their inflation expectations or inflation forecast and then there will certainly be a lot more room for further easing.''

"Between now to October there is half a year and now it's very fluid in the market, especially with regards to deflation. And if core inflation, currently hovering just above 1 percent, goes down even towards 0.5 percent in the next few months, I think they may do the off-cycle policy again like what we saw in January. All eyes are on oil prices."

DBS' Mr Seah said:"In sum, outlook for the three key trading partners - China, Eurozone and Japan - is expected to remain dicey while the recovery in the US economy has been slow. Nothing in the external environment suggests an improvement in growth momentum in the near-term. Overall GDP growth forecast for 2015 remains at 3.2% but we see downside risks ahead."