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Monetary Policy

'Modest' appreciation of S$ expected

As restructuring continues, economists expect no change in exchange rate policy

THE idea of a default monetary policy stance amid restructuring will come into sharp focus this week, when the central bank announces its half-yearly monetary policy statement on Tuesday - ST PHOTO: KEVIN LIM


THE idea of a default monetary policy stance amid restructuring will come into sharp focus this week, when the central bank announces its half-yearly monetary policy statement on Tuesday.

With core inflation stubbornly above the 2 per cent mark - exacerbated by a tight labour market, which continues to push wages higher - private-sector economists are expecting the Monetary Authority of Singapore (MAS) to stick to its current policy stance of a "modest and gradual" appreciation of the Singapore dollar.

If the MAS does keep to that position on Tuesday, it would mark the fifth review in a row in which no change is made to the policy band's midpoint, slope, or width.

Economists told The Business Times that the protracted period of "no change" makes sense; in fact, some agree that the gradual strengthening of the Singapore dollar (relative to a basket of major trading partners' currencies) is the default approach during restructuring.

Said Mizuho economist Vishnu Varathan: "Such an enduring policy stance is perhaps symptomatic of the delicate and uncomfortable balance required to stave off wage pressures due to restructuring efforts on the one hand, and a patchy global recovery on the other... Is it unusual (to stand pat for so long)? Perhaps, but the times are unusual as well. And policy ought to be more a creature of necessity than legacy."

With the overall unemployment rate at 2 per cent - a rate so low, the economy is considered by economists to be effectively at full employment - the market consensus is that the MAS will assess that risks to inflation expectations are tilted to the upside, thereby ruling out any easing in monetary policy.

Bank of America Merrill Lynch economist Chua Hak Bin noted that previously, when labour supply was in abundance, companies in Singapore could accommodate improved export demand from looser monetary policies, by hiring additional workers to produce more. Now, however, there is a limit to how many companies can hire.

Said Mr Chua: "If the labour market is already tight and you're aware that wage pressures are going to show up, you wouldn't want to ease policy knowing it will only exacerbate labour market pressures and intensify wage cost pressures. There is now limited slack to accommodate any stimulus.

"Five or 10 years ago, I probably would not have bothered to look at the labour market (when pre-empting monetary policy decisions), because it wouldn't have been that much of a constraint in the past. But in the last four years, the government has taken concrete steps to really tighten the labour market, and the impact on inflation is there."

Still, economists stressed that the lack of change in policy should not be equated with stasis, since the current stance entails a "slightly steeper" S$NEER (Singapore nominal effective exchange rate) appreciation slope - one that remains relevant in the context of wage-price spiral risks.

The last time the central bank held its policy stance for an extended period was between April 2004 and April 2007, when the economy expanded strongly and core inflation stayed low. Then, the "modest and gradual" appreciation policy was left unchanged six times in a row.

While headline inflation has softened in recent months - falling to a six-month low of 0.9 per cent in August - economists were keen to stress that the easing was mostly policy-driven due to loan curbs, and that underlying price pressures remain. This is reflected in the higher core inflation reading, which strips out accommodation and private road transport costs.

Said Mr Chua: "We expect the gap between headline and core inflation to persist. A larger housing supply is dampening rents, while stricter car loans and larger COE (certificate of entitlement) supply are lowering private transport costs."

Both Mr Chua and Citi economist Kit Wei Zheng think inflation for the whole year could go as low as 1 per cent - below the current official estimate of 1.5-2 per cent - although they agree such a moderation in the headline number would be inconsequential to policy outcomes.

Noted CIMB economist Song Seng Wun: "Unless core inflation moves outside the current 2-3 per cent forecast range, we can say that the present policy stance is the default stance."

Bank of Singapore senior currency strategist Sim Moh Siong estimates that the S$NEER has been hovering mostly in the upper half of the band, tracking a moderate appreciation path and "nowhere close to testing (the) limits of the policy band".

Mr Sim and Barclays economists Leong Wai Ho and Bill Diviney have a 12-month USDSGD forecast of 1.29.

"(This) reflects the view that in a world of broadening US dollar strength, even a continued appreciation policy bias to the S$NEER will not necessarily result in SGD outperformance versus the USD," said Mr Sim.

As for Gross Domestic Product growth, the Ministry of Trade and Industry (MTI) is due to announce its flash estimate of Q3 GDP growth on Tuesday as well. Economists are expecting year-on-year growth of 2.7 per cent, according to the median forecast of a Bloomberg poll.

INFOGRAPHIC: How Singapore's monetary policy works