MAS keeps monetary policy unchanged, raises headline inflation forecast to 0.5-1.5%

SINGAPORE'S monetary policy settings were kept unchanged on Wednesday, a decision that came on the back of a soft core inflation outlook.

The Monetary Authority of Singapore (MAS) stood pat on the neutral slope, lower mid-point and policy band width of the Singapore dollar nominal effective exchange rate (S$NEER), after last tweaking these parameters with a double-shot easing in March last year.

"As core inflation is expected to stay low this year, MAS assesses that an accommodative policy stance remains appropriate," the MAS said in its half-yearly monetary policy statement. This was a subtle break from its last statement in October 2020, where the central bank said that an accommodative stance could be needed "for some time".

Said Vishnu Varathan, head of economics and strategy at Mizuho: "As the recovery unfolds, the MAS is at the margin taking a more state-dependent view on maintaining accommodation rather than a time-assured stance, which is probably more appropriate when economic stress and uncertainty are greater.

"But equally, this is not at odds with the MAS being unhurried about normalisation."

To be sure, the forecast range for all-items inflation was bumped up to between 0.5 per cent and 1.5 per cent, compared with -0.5 per cent to 0.5 per cent before.

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The MAS cited higher-than-expected increases in private transport and accommodation costs in the first two months, and added that "private transport costs should stay resilient" on better consumer sentiment and reduced Certificate of Entitlement quotas.

But the forecast for core inflation - which excludes accommodation and private road transport costs - was held steady at zero to 1 per cent. The MAS uses core inflation as a gauge for monetary policy and medium-term price stability.

"Notwithstanding some upside risks to global price pressures, inflation in Singapore is projected to rise at a more gradual pace in H2 2021," the MAS said.

"While higher global oil prices will continue to pass through to domestic prices, surplus oil production capacity should cap further large price increases."

The MAS decision was in line with analyst expectations, and priced into the market with a slight strengthening of the Singapore dollar recently.

That's as Ministry of Trade and Industry advance estimates on Wednesday showed gross domestic product (GDP) growth of 0.2 per cent in the first quarter of 2021.

"Singapore's GDP growth this year is likely to exceed the upper end of the official 4 per cent to 6 per cent forecast range, barring a setback to the global economy. The negative output gap in the economy will narrow through the course of 2021," the MAS noted.

Still, it added that output is expected to fall below potential in 2021, and core inflation, while tipped to rise gradually, "will remain short of its historical average".

Even as job conditions improve and private consumption recovers, the MAS projected "subdued wage growth as the slack in the labour market will take time to be fully absorbed".

Stephen Innes, chief global markets strategist at forex trader Axi, said that "there was only a slim chance of a hawkish surprise" in the monetary policy decision.

But the Singapore dollar "has scope to strengthen further, as the statement supports more hawkish action in October", he added in a morning note.

Similarly, DBS currency strategist Philip Wee said: "The improved outlook may wean the S$NEER off the mid-point to the centre in the upper half of its band." He has forecast an exchange rate of 1.37 against the greenback as at mid-year.