MAS likely to slow pace of Singdollar appreciation: analysts

Singapore

MARKET watchers are expecting the Monetary Authority of Singapore (MAS) to ease its monetary policy stance for its review in mid-October, with the central bank likely to slow down the pace of the Singapore dollar gain against a basket of currencies.

In a research note on Wednesday, OCBC analysts noted: "Our base case scenario is for the MAS to reduce the slope of the S$NEER (Singapore dollar nominal effective exchange rate) policy band from the currently estimated +1 per cent per annum appreciation path, to +0.5 per cent per annum. We expect no change in the width and centre of the policy band."

This is in line with a forecast by DBS analysts, who similarly expect the MAS to decrease the annual appreciation pace of the S$NEER to 0.5 per cent at the upcoming policy review.

In August, Singapore's core inflation remained at 0.8 per cent, unchanged from July, when it eased to its slowest pace in more than three years. Headline or overall inflation also increased slightly to 0.5 per cent, from 0.4 per cent in July.

"The fact that core inflation remains persistently below the medium-term historical average of just under 2 per cent may persuade MAS to loosen monetary policy in its upcoming policy meeting," said United Overseas Bank economist Barnabas Gan.

The OCBC analysts believed that the ongoing uptrend of the S$NEER relative to parity is largely driven by external factors, and not a reflection of reduced domestic concerns today, as compared to the pre-August period. They also noted that the Singdollar outperformed its Asian counterparts amid renminbi-led weakness, as the Sino-US trade tensions escalated in August, keeping the S$NEER buoyed. Subsequently, the alleviation of tensions from September onwards saw the Singdollar recover against the US dollar and the yen, providing further support for the S$NEER.

"Despite the soft domestic and global growth/inflation narrative, the S$NEER is still effectively flat year to date. There is room for the S$NEER to ease lower to provide the stimulus required for the economy," the OCBC analysts explained.

Since MAS's April monetary policy statement, domestic growth or inflation outcomes have softened steadily. "The downward revision of the 2019 official growth forecast in August to zero to one per cent year on year (from 1.5 to 2.5 per cent year on year in May 2019) probably best encapsulates the loss of momentum.

"A wide range of indicators, ranging from PMIs (purchasing managers' index) to NODX (non-oil domestic exports), also point towards a slowdown," the report highlighted.

Globally, PMIs have continued to lose traction, with the composite leading indicators showing no signs of bottoming out. Arguably, the ongoing Sino-US rapprochement is a slight bright spot for the global economy, but without a concrete truce, the situation may be too fragile to generate sustained optimism, the OCBC analysts said.

Consequently, they believed that the MAS should undertake some form of easing action, with the extent of easing the only question.

"While the risk of a more dovish move to a zero rate of appreciation cannot be fully discounted, we think this drastic step may not be warranted for now. Taking this step would imply an official economic prognosis that is considerably worse than our expectation. On balance, we think a measured easing action to an estimated +0.5 per cent per annum appreciation path may be the most likely scenario."