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SINGAPORE ECONOMY

Tighter monetary policy still on the cards as core inflation climbs

Singapore economy grew 3.9 per cent year on year in the second quarter of 2018, following an expansion of 4.5 per cent in Q1

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Trade tensions threaten Singapore's growth for the second half of 2018, but some economists still say the door to further monetary policy tightening in October remains open.

Singapore

TRADE tensions threaten Singapore's growth for the second half of 2018, but some economists still say the door to further monetary policy tightening in October remains open.

Unless external conditions deteriorate sharply, a gradual normalisation of monetary policy cannot be ruled out as domestic demand continues to firm and core inflation climbs, they added.

This comes as Singapore was issued a strong half-year report card on Monday. The economy grew 3.9 per cent year on year in the second quarter of 2018, following an expansion of 4.5 per cent in Q1.

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The overall outlook was more muddied: The Ministry of Trade and Industry (MTI) projected that the Singapore economy is expected to slow down in the second half of the year, even as it maintained its full-year forecast of 2.5-3.5 per cent. But in a surprise move, the 2018 non-oil domestic export growth forecast was hiked from 1-3 per cent to 2.5-3.5 per cent, in separate data from Enterprise Singapore.

Economists latched on to comments from the Monetary Authority of Singapore's (MAS) deputy managing director Jacqueline Loh on Monday, when she emphasised that the "stepdown" in the growth of the second half of the year was "anticipated and had been taken into account" in the central bank's April policy decision.

This could mean that more tightening - or a stronger Singapore dollar - could be in the works, suggested economists.

In its last monetary policy statement (MPS) in April, the MAS had opted to slightly increase the slope of the Singdollar nominal effective exchange rate (S$NEER) policy band to allow for "modest and gradual" appreciation.

OCBC economist Selena Ling said: "The option for a further gradual tightening of monetary policy at the October MPS remains on the table in our view, given that domestic core inflation is likely to cross the 2 per cent year-on-year handle as early as August."

Bank of America Merrill Lynch's economist Mohamed Faiz Nagutha was more pointed: "We believe the October policy meeting is still very much 'live' and continue to be biased towards further gradual S$NEER slope steepening."

He noted that the tightening decision in April was "done in a very gradual fashion" and is "merely the first step" towards full policy normalisation.

But economists are cognisant that a rapid worsening of the trade conflict would not only shift policy, but could also lower economic growth.

An earlier report by OCBC projected that if US$250 billion of tariffs on China goes ahead, it could shave off 0.3 per cent of Singapore's gross domestic product (GDP) growth.

The MTI flagged trade tensions as a key downside risk, alongside faster-than-expected normalisation of monetary policy in the US.

MTI Permanent Secretary Loh Khum Yean reiterated that the government sees three possible avenues of impact from the trade tensions.

The first is through direct impact, where the US imposed global trade tariffs on items such as steel and aluminium. While there are Singapore companies that export such products directly to the US, it accounts for less than 0.1 per cent of Singapore's trade, said Mr Loh.

The second impact is indirect, where Singapore faces spillover effects as global supply chains get disrupted.

Bilateral trade between the US and China indirectly contributes 1.1 per cent of Singapore's GDP, according to Minister for Trade and Industry Chan Chun Sing, in a July speech in Parliament.

Mr Loh said the third possible impact of trade tensions is the most "worrisome" of all, which is when an escalation of the trade conflict ends up in a sharp fall in global confidence that would impact investments and trade.

However, he said that it is still "early days" to determine the extent of the second and third impacts, but added that the authorities are monitoring the situation closely.

In line with the MTI keeping its full-year forecast of 2.5-3.5 per cent, economists are mostly sticking to their projections for now.

Nomura, DBS and OCBC continue to maintain their 2018 GDP forecast at 3 per cent, while UOB kept to its projection of 2.8 per cent.

On the more positive end of the spectrum, Maybank Kim Eng stuck to its above-consensus forecast of 3.5 per cent growth this year, while Bank of America Merrill Lynch stayed the course at 3.3 per cent.

But all parties are keeping a watchful eye on global developments, as things could change as quickly as it takes to tweet.

"We do not view the 2Q18 GDP growth disappointment as a definitive game-changer for the MAS, but have to wait and see how much the external environment, especially on the trade and geopolitical fronts, continues to deteriorate in the next one month or two," said OCBC's Ms Ling.

"Even right now, the Turkish crisis is developing, with potential contagion to emerging markets, which suggests that the situation remains very fluid."

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