MAS monetary policy decision will be a close call, say economists

Singapore

WILL the Monetary Authority of Singapore (MAS) surprise again on Wednesday, when it releases its October monetary policy statement, or will it follow the market's script?

If the central bank moves in tandem with most economists' expectations, a weakening of the Singapore dollar will be on the cards - whether by a downward recentring of the S$NEER (Singapore dollar nominal effective exchange rate) band, or a reduction in the band's slope to a neutral policy stance.

But the MAS has also repeatedly shown that it is capable of catching the market by surprise. This time, a small minority of economists say the central bank will keep all policy settings on hold, with no change to the slope and width of the policy band, and the level at which it is centred.

According to a Reuters poll, 12 out of 18 analysts surveyed say their base case is for an easing in policy. The others expect no easing, although two believe the MAS is likely to widen the Singapore dollar's policy band, to accommodate higher market volatility.

Still, economists BT spoke to unanimously agree that it is a close call. Said Mizuho's Vishnu Varathan: "I think they're going to ease - but I say this with the same conviction of a snowball in hell."

Economists in the pro-easing camp include those from Bank of America Merrill Lynch (BAML), CIMB Private Banking, Credit Suisse, DBS, Mizuho, and UOB. They believe the central bank will ease in response to a probable technical recession, and amid the absence of inflationary pressures.

On the prices front, core inflation - which strips out accommodation and private transport costs, and is the focus for monetary policy - has continued to undershoot official forecasts.

While the government projects full-year core inflation to come in at the lower half of 0.5 to 1.5 per cent, it has actually come under the 0.5 per cent mark since April. "Inflationary pressures are largely absent, thanks to lower oil prices, falling rents, stable Certificate of Entitlement (COE) premiums and a host of budget measures including healthcare subsidies. Concerns over rising wage cost pressures passing through to consumer prices have also not materialised," said BAML's Chua Hak Bin.

He and most private-sector economists expect the MAS to lower both its headline and core inflation forecasts for 2015.

As for growth, economists highlight how conditions have deteriorated significantly since April's monetary policy meeting - providing further ammunition for an easing this week.

Singapore is now teetering on the edge of a technical recession in Q3, with the median forecast of 10 economists polled by Bloomberg pointing to a 0.1 per cent contraction in GDP in quarter-on-quarter, seasonally-adjusted annualised terms.

A technical recession is defined as two straight quarters of sequential contraction in GDP.

Said CIMB Private Banking economist Song Seng Wun: "The only reason growth is still within the 2 to 2.5 per cent range so far is because of Q1, which pulled things up. The other quarters haven't been good, and looking ahead at the challenging conditions, it suggests that growth will stay outside of the official range."

Given both the inflation and growth outlook, economists like Mr Song and those from DBS and UOB expect a downward recentring of the Singapore dollar's policy band, while those from Credit Suisse and Mizuho foresee a shift to a zero appreciation stance via a slope reduction.

Even more aggressive is BAML's call - Dr Chua sees both a zero bias and a recentring move, "given the odds of a technical recession and the balance of downside risks".

Still, other economy-watchers say the likelihood of this happening is very slim. Historically, the MAS has never recentred the band without first having adopted a flat slope in a previous meeting.

A handful of economists - including those from Barclays, Citi, HSBC, and OCBC - are not convinced by the majority's calls for easing. Instead, they believe the MAS will keep all policy settings on hold.

Said HSBC economist Joseph Incalcaterra: "A technical recession in itself is probably not enough to trigger a policy shift. The MAS would have to downgrade its core inflation view and maintain the 2015 forecast range into 2016 ... We think the hurdles to easing still remain high."

Added OCBC's Selena Ling: "I don't think MAS is typically bothered by a technical recession, unless you get an outright full-year sharp drop. As long as growth is around the 2 per cent handle for the full year, it's dismal, but it's not dire."

She and Citi's Kit Wei Zheng and Yap Kim Leng also disagree with the view that inflation will remain a non-concern. "With wage pressures (expected) to persist and fading base effects, a pick-up is likely from late 2015," said the Citi economists in a research note.

Ms Ling added that it will be "quite radical" for the central bank to move twice in a year, especially after MAS eased in a surprise move in January 2015, reducing the slope of the S$NEER appreciation bias.

Even with his easing call, Mr Song joined Mr Incalcaterra and Ms Ling in cautioning that an easing would pressure short-term interest rates higher, since these rise as expectations of Singdollar depreciation increase.

"That's going to hurt the domestic economy more, in terms of the hit to businesses and also households, who would be dealing with higher mortgage rates. We have to take into consideration the fact that MAS is not like other central banks, who can easily cut rates and not get these unintended consequences," stressed Ms Ling.

As for a possible band widening, Mr Kit and Mr Yap said: "With MAS reluctant to undermine the anchor of stability, the hurdle for such a move therefore is high ... Band widening is a relatively rare occurrence, with only three instances in the last twenty years, when specific severe global or external event shocks triggered heightened market volatility and/or economic uncertainty."

MAS will announce its monetary policy statement at 8am on Wednesday, Oct 14.

READ MORE: Technical recession: will we, or won't we?