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MAS stays the course with neutral stance on monetary policy

The market had expected MAS to signal an intent to tighten its monetary policy, but with the dovish forward guidance on Thursday, reaction was swift: the Singapore dollar slid almost 0.3 per cent to S$1.3992 to US$1.


ROUND two goes to Singapore's monetary policy doves.

In its second scheduled policy statement since it last flattened the Singapore dollar policy band, Singapore's central bank said on Thursday that it will maintain its neutral stance, shrugging away expectations of a tightening move that had emerged on the back of a pickup in pace of growth.

The Monetary Authority of Singapore (MAS) even used the phrase that appeared in its previous statement - that this stance was appropriate for an "extended period" to ensure medium-term price stability; it expects core inflation to trend towards but average slightly below 2 per cent in the medium-term.

Market voices on:

MAS' dovish signal on Thursday led many economists to surmise that the central bank is unlikely to move any time this year.

Citi economists wrote: "This perhaps suggests that the MAS wants to signal that it remains in 'wait and watch' mode, and prefers to 'lean against the wind' of overly hawkish market expectations (of a tightening move)".

The market's focus in this policy statement was on whether MAS would signal an intent to tighten its policy. The dovish "extended period" forward guidance thus elicited a swift reaction: the Singapore dollar slid almost 0.3 per cent to S$1.3992 to US$1 in the first minute after the announcement.

MAS ensures price stability in Singapore by managing the Singapore dollar against a trade-weighted basket of currencies of her major trade partners. The Singapore dollar is allowed to float within an undisclosed S$NEER (Singapore dollar nominal effective exchange rate) band.

MAS makes these decisions based on assessed risks to Singapore's growth and inflation, and announces changes, if any, usually in April and October, in its monetary policy statement (MPS).

Its statement for April 2017 on Thursday - saying it would stay the course for the S$NEER policy band - marked the second time that MAS is standing pat on its position since it last flattened the policy band in April 2016. It went on to keep this stance six months later, in October 2016.

But the economic situation turned quickly for the better in the last quarter of that year. Fourth-quarter, year-on-year growth came in stronger than expected at 2.9 per cent.

Thursday's flash estimates for the first quarter of this year showed that the economy grew 2.5 per cent.

Economists also noted that MAS spoke of a brighter global outlook for Singapore in Thursday's statement.

"The outlook for the global economy has improved slightly since the October 2016 MPS," it said, citing an increase in global capital expenditure, strengthening in business sentiment and a stabilising outlook for China as signs of improvements.

But the fact that MAS still reiterated that the neutral stance was needed for an "extended period" has left economists wondering how firm growth prospects for Singapore are.

Many economists pointed to the weak domestic situation as a reason for MAS to retain its forward guidance. It had said that "conditions in the labour market have slackened since the last policy review"; demand-driven inflationary pressures will also "likely be restrained".

These are "key ingredients" that OCBC economist Emmanuel Ng thinks led to MAS to keep its stance.

But some economists believe that, despite the stronger global outlook, having a neutral stance for an "extended period" acts as a form of insurance for MAS.

This phrasing is "justifiable 'insurance' meant to accommodate 'downside risks' amid 'significant policy uncertainty' despite growth rebound", wrote Vishnu Varathan of Mizuho.

NatWest Markets' Vaninder Singh took it one step further, saying that signs are pointing towards a slowdown ahead for Singapore. With increasing slack in the labour market, the manufacturing bump to ease off and China's economy to peak in the second quarter, slowing growth is to be expected.

"With this backdrop, we continue to view a re-centring as being necessary. Only much stronger growth data compared to now will change this view," he wrote.

There are still some hawks among the doves. Maybank Kim Eng's Chua Hak Bin said that, by including the phrase "extended period", MAS was, in effect, quoting what it had said in last October's statement.

He said it may therefore be time for MAS to tighten soon. "One year probably qualifies as an 'extended period', as the phrase was used in last October's MAS statement."

MAS has maintained its 2017 headline inflation forecast for this year at between 0.5 to 1.5 per cent, and core inflation at between 1 to 2 per cent.

But Dr Chua pointed out that administrative prices are set to increase. Residents in public housing will have to pay higher service and conservancy charges from June 1; water prices are also set to rise.

"We maintain our view that the MAS will likely shift to a "slight appreciation bias" at the October meeting, given upside risks to both inflation and growth," he wrote.

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