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MAS keeps neutral stance, softens guidance

The October Monetary Policy Statement is highly nuanced. Economists expect a moderate slope increase in April

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The central bank has maintained the rate of appreciation of its S$NEER policy band at zero per cent.

Singapore

GUIDED by inflation that was largely kept in check even as the economy grew at the fastest pace in more than three years in the third quarter, the Monetary Authority of Singapore (MAS) is keeping its neutral stance on its exchange rate-based policy.

In its Monetary Policy Statement (MPS) on Friday, the central bank maintained the rate of appreciation of its Singapore dollar nominal effective exchange rate (S$NEER) policy band at zero per cent.The width of the policy band and the level at which it is centred remains unchanged.

The MAS also softened its forward-looking guidance, alluding to its comments in its statement a year ago that the neutral stance would be appropriate for an "extended period", without dropping it entirely.

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Rather than use interest rates, the MAS uses the Singapore dollar exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth. The rate is allowed to float within a band that can be adjusted when monetary policy is reviewed.

Easing was done thrice between January 2015 and April last year;  the latest move is in line with the forecasts of all but one of the 23 economists Bloomberg polled.

The MAS explained that since its April MPS, when it kept the slope of its S$NEER policy band at zero per cent with no change to the width of the policy band or the level at which it was centred, the S$NEER has fluctuated around a strengthening trend in the upper half of the policy band.

The mild appreciation over the past six months reflected the broad-based US dollar weakness and the depreciation of a number of regional currencies against the Singapore dollar (SGD). The three-month Singapore Interbank Offered Rate (Sibor) rose from 1 per cent at the end of April 2017 to 1.12 per cent at the end of last month.

Market participants appeared to have interpreted the latest MPS as more dovish than expected. HSBC said its estimate of the S$NEER initially rose to as high as 1.4 per cent above-mid, just before the announcement as some investors were probably expecting a slope change. But it fell to 1.1 per cent above-mid after the event.

USD-SGD fell to as low as 1.3508 before the MPS and touched as high as 1.3549 afterwards.

Sim Moh Siong, currency strategist at the Bank of Singapore, said: "The MAS avoided sounding hawkish as we expected, even as it stepped away from the 'extended period' guidance and notwithstanding the strong third quarter 2017 gross domestic product (GDP) outcome. The wait-and-see approach seems prudent in our view."

The MAS statement hints at a preference for policy flexibility, and seems keen to temper hawkish expectations. After all, while the Singapore economy grew at a faster-than-expected rate of 4.6 per cent in the third quarter, growth is expected to moderate to a slightly slower pace next year, the MAS said. Headline inflation is expected to come in at around 0.5 per cent this year, and stay in the range of 0 to 1 per cent next year.

Come next April, the neutral stance will have been in place for 24 months - six months longer than during the Global Financial Crisis (October 2008 to April 2010), economists said.

With the improvement in the growth-inflation dynamics, UOB economist Francis Tan believes the MAS might soon embark on a monetary policy normalisation from the next policy meeting in April, "possibly embarking on a 0.5 per cent per annum slope to mark the start of it all", he said.

He is keeping his year-end USD/SGD forecast at 1.38 and end Q2 2018 USD/SGD forecast at 1.40.

The Bank of Singapore's Mr Sim expects the MAS to leave its policy unchanged at its next meeting in April, given the absence of a significant pickup in the momentum of key data and a broadening of growth beyond the technology sector.

"SGD at slightly on the strong side of the S$NEER band, as is the case currently, seems reasonable to us. We are, however, inclined to fade S$NEER strength if the S$NEER trades 1 per cent above the mid-band," he said, keeping his 12-month USD/SGD forecast at 1.39.

He said a significant rise in USD/SGD is unlikely, as the medium-term outlook for the USD is increasingly murky, with monetary tightening no longer exclusive to the US among the developed economies.

"The USD reign seems close to an end," he said.

Looking ahead, DBS Bank senior currency strategist Philip Wee expects the MAS to revert to an appreciation stance next year. However, the timing - whether in April or October - will depend much on the pace of the improvement in the labour market and the extent of the buildup in domestic inflationary pressure in the next six to 12 months.

Mr Wee expects the USD/SGD to trade in a 1.33-1.38 range for the next 12 months.

As for the SGD interest rates, some upward pressures are expected. He said: "With SGD interest rates having normalised below USD interest rates, the period of negative correlation between Sibor/SOR (Swap Offer Rate) and Libor (London Interbank Offered Rate) is over. The pass-through of Fed hikes onto SGD interest rates will likely be around 0.5-0.7."