MAS Singdollar policy tipped to be in neutral gear for a while

Singapore

THE Singapore dollar nominal effective exchange rate (SGDNEER) path may not return to appreciation bias until as late as 2022, analysts say.

But punters may already be betting on the SGD, with HSBC currency strategist Joey Chew dubbing the market "emboldened by diluted forward guidance". Commentators believe the SGD could end the year against the greenback at 1.35 or 1.36, strengthening again to 1.31 or 1.32 by end-2021.

This is even as the Monetary Authority of Singapore (MAS) both warned of weak underlying economic growth momentum and expected inflation to stay subdued in the year ahead - despite hopes of a return to mild positivity for core inflation.

Singapore's central bank kept its monetary policy settings unchanged at a half-yearly review on Wednesday, while signalling that its neutral stance is likely to persist on a soft economy.

October's decision to stand pat on the width, mid-point and "zero slope" of the SGDNEER policy band followed two earlier rounds of MAS easing.

"As core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time," it said.

The MAS is thus tipped to leave policy settings unchanged again at its next meeting in April, with Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye citing "the sluggish recovery and muted inflation risks".

The neutral position could continue for "the foreseeable future", added Ong Sin Beng from JPMorgan's economic and policy research team - "possibly through year-end 2021".

Looking further ahead, Vishnu Varathan, head of economics and strategy at Mizuho, told The Business Times that he does not expect policy normalisation until 2022. He added: "Whether this is in April or October will depend on the path - how uninterrupted and strong - of the recovery."

The MAS has projected core inflation - which strips out accommodation and private road transport costs - to come in at between zero and 1 per cent next year, rising from a forecast of -0.5 per cent to zero for 2020.

Still, it noted that core inflation could "remain well below its long-term average", while headline or all-items inflation may come in at between -0.5 per cent and 0.5 per cent in 2021.

On the foreign-exchange front, watchers expect the SGD to retain its strength in the months ahead, with the support of the yuan, in the face of a softening US dollar (USD). Pointing to HSBC's "positive view on the SGD", Ms Chew predicted that the SGDNEER would "start inching up next year into the upper quadrant of the band" from around the policy mid-point now.

Still, Peter Chia, senior currency strategist at UOB, said: "While the SGD has strengthened from 1.42 to 1.36 against the USD, it is offset by the SGD weakness against a number of currencies in its trade basket. It is likely the relative stability of the SGDNEER around the mid-point will continue."

Barclays watchers also think that SGDNEER strength - which they said came as "markets correctly priced the end of the easing cycle and reacted to a weak USD and selective strength in Asian foreign exchange" - may have peaked and is "somewhat premature" in light of a weak economic outlook.

Amid the Covid-19-driven economic uncertainty, watchers were mixed on what the coming year could hold for monetary policy. Said Mr Varathan: "If there was to be a move in 2021, it is more likely to be calibrated easing than pre-emptive tightening."

Similarly, Citi analysts said in a research note that more policy easing could take place as early as next April, "especially if the uptick in inflation is weaker than expected". They added: "MAS may not be averse to a weaker NEER within the band, though this needs to be driven by the market."

Barclays, on the other hand, said the bar for more easing would have to be higher, as fiscal policy is the preferred response. Instead, it found the risks "tilted slightly in favour of a tightening", should the global economy recover ahead of expectations.

At the end of the day, Standard Chartered's research team dubbed the MAS guidance on future policy "more flexible" than during its last stretch of neutral bias in 2016, since this recession stems from a viral pandemic and not the conventional demand-supply mismatch of the past.