MAS catches market off-guard, sends Sing dollar soaring

Singapore

THE Singapore dollar shot up on Tuesday, as the Monetary Authority of Singapore (MAS) caught the market off-guard for the second time in three months - this time by keeping the currency on the same "modest and gradual" appreciating path.

Defying expectations of a policy adjustment at its half-yearly review, the central bank made no change to the S$NEER (Singapore dollar nominal effective exchange rate) band, maintaining its mid-point, slope, and width.

Swayed partly by recent movements in the S$NEER, market views had been starkly divided prior to the announcement. Indeed, economists were split on how MAS would alter its Singapore dollar policy - or whether it would even adjust its stance at all. While some economists had called for easing via a lowering of the policy band's mid-point, others had pegged a band widening as the likely outcome. Only a small minority saw no change.

Explaining its decision to keep the S$NEER band as is, MAS said that neither its growth nor inflation forecasts have changed since its off-cycle slope-reduction on Jan 28.

"The Singapore economy is evolving as envisaged in the January monetary policy statement. GDP is on track to grow at 2 to 4 per cent in 2015, and there is no change to the forecasts for (inflation)," said the central bank. It reiterated its full-year headline and core inflation forecasts of -0.5 to 0.5 per cent, and 0.5 to 1.5 per cent respectively.

It added that external price pressures should be contained, while the domestic pass-through of costs to consumer prices is expected to be moderate this year. Beyond the near term, however, MAS flagged how underlying cost and price pressures could pick up, given the continued tightness in the labour market.

"MAS will therefore maintain the policy of a modest and gradual appreciation of the S$NEER policy band . . . This policy stance is consistent with the benign inflation outlook and moderate growth prospects for the whole of 2015, and appropriate for ensuring medium-term price stability in the economy," said MAS.

Thanks to earlier market chatter that MAS would ease - with speculators shorting the Singapore dollar as a one-way bet - the currency firmed against the greenback on Tuesday morning, following MAS's surprise decision to stand pat.

UOB economists Francis Tan and Jimmy Koh noted: "Within a minute from the release of the monetary statement at 8am, the USD/SGD was sold down from the S$1.3737 level to the S$1.3607 level, representing an almost 1 per cent decline."

Since the Jan 28 monetary policy statement, the S$NEER has fluctuated within the lower half of the policy band, said MAS. While the S$NEER has strengthened recently, it depreciated over February to mid-March amid the broad-based strength of the US dollar.

Economists and analysts from Barclays, Citi, Credit Suisse and OCBC estimate that the S$NEER is now trading towards the policy band's mid-point.

On the inflation front, MAS said that headline inflation fell to -0.3 per cent year-on-year in the January-February period, from 0 per cent in Q4 2014. But MAS was keen to stress that although inflation has looked benign, underlying cost pressures remain.

It said: "Core inflation and (headline) inflation are expected to ease further before rising towards the end of the year and into 2016, as global oil prices pick up and the effects of the reduction in healthcare costs fade. At the same time, the labour market will be tight. The risk remains that underlying cost pressures in the economy could mount, leading to a stronger pass-through to consumer prices over the medium term."

This watchfulness prompted several commentators - including those from Citi, Credit Suisse, HSBC and Maybank - to note MAS's hawkish tilt.

Said Mizuho economist Vishnu Varathan: "I think (MAS) was quite cautious of declaring that those days (of rising cost pressures) are behind us. So without saying it, I think they were telling the market: 'Guys, this step down (in monetary policy) is not going to happen.'"

Still, Citi economists Kit Wei Zheng and Yap Kim Leng said: "If anything, MAS's lingering vigilance over underlying cost pressures from the tight labour market gave a somewhat hawkish tone to the policy statement, which may have been intended to reduce speculation of further easing going forward. Whether or not this hawkish tone is warranted remains to be seen."

As for the economy, on a seasonally-adjusted quarter-on-quarter annualised basis, Singapore's GDP growth slowed to 1.1 per cent in Q1 2015, according to advance estimates released by the Ministry of Trade and Industry (MTI) on Tuesday. This was far slower than Q4 2014's 4.9 per cent quarter-on-quarter growth, as Q1's performance was pulled down by a contraction in the manufacturing sector.

Still, MAS reaffirmed the Singapore government's 2-4 per cent GDP growth forecast for 2015. It said that the sustained albeit uneven recovery in the global economy should provide a mild uplift to externally-oriented sectors - although any gains will be tempered by domestic supply-side constraints.

Given MAS's expectations for inflation to rise towards the end of this year and into 2016, the bulk of private-sector economists - including those from Barclays, Credit Suisse, HSBC, Maybank, Mizuho, Nomura, Stanchart, and UOB - see no change in monetary policy in October, when the next MAS review is due.

But divergent views still exist. Bank of America Merrill Lynch and Bank of Singapore see room for easing in October, while BNP Paribas's Philip McNicholas thinks a widening of the policy band is possible then.

Said Mr McNicholas: "Intriguingly, despite the clear escalation since mid-2014, MAS did not make a single reference to financial market volatility. In our view, this not only leaves band widening as an option in October but also of another intra-meeting decision."

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