MAS holds steady at July review; economists expect easing only in 2025

SINGAPORE’S central bank might only ease monetary policy settings in early 2025, said economists, after it left policy unchanged for the fifth straight meeting during the July review.

The Monetary Authority of Singapore (MAS) said on Friday (Jul 26) that it will maintain the prevailing rate of appreciation of the Singapore nominal effective exchange rate (S$NEER) policy band, with no change to its width and level at which it is centred.

It also expects gross domestic product growth to come in “closer to its potential rate” of 2 to 3 per cent for the full year, which is at the higher end of the Ministry of Trade and Industry’s forecast range of 1 to 3 per cent.

This is while it lowered its full-year forecast for headline inflation to a range of 2 to 3 per cent, but maintained its core inflation forecast range at 2.5 to 3.5 per cent.

“The MAS is likely in no rush to ease policy yet, with growth momentum improving while the fight against inflation is still not completely over,” said Lloyd Chan, senior currency analyst at MUFG global market research.

“Our base case is still for the MAS to start loosening its policy settings in early 2025, when we think core inflation will return to the central bank’s soft target of 2 per cent,” he added.

Maybank economists Chua Hak Bin and Brian Lee also see MAS maintaining the current appreciation stance of the S$NEER policy band for the rest of 2024, as growth recovers to potential while core inflation remains “somewhat sticky”.

“The lower headline inflation should not be taken as a signal that the MAS is prepared to ease at the next meeting in October, as the fall is largely due to lower private transport costs,” they said.

June’s inflation readings were softer than expected. Core inflation, which excludes accommodation and private transport, was at 2.9 per cent, and headline inflation fell to a three-year low of 2.4 per cent.

Chua and Lee expect MAS to relax policy settings at the January review by a change in the slope of the policy band. “We think the MAS will want to ensure that the job of tackling is finished before taking the pedal off.”

Eighteen out of 19 analysts polled by Bloomberg had expected MAS not to take action during the July review – the third of its new quarterly schedule; the remaining analyst expected a reduction of the policy band slope. Most of them also expected the central bank’s tone to stay unchanged.

Disinflation on track

Singapore’s economy is expected to strengthen over the rest of 2024, with the slight negative output gap closing by year-end, said MAS in its monetary policy statement. “Barring renewed shocks to costs, core inflation should step down more discernibly in Q4 and fall to around 2 per cent in 2025.”

Current monetary policy settings thus remain appropriate, said the central bank.

“The prevailing rate of appreciation of the policy band will keep a restraining effect on imported inflation as well as domestic cost pressures, and ensure medium-term price stability.”

Following Friday’s decision, DBS economist Chua Han Teng and senior foreign exchange strategist Philip Wee lowered their headline and core inflation forecasts to 2.4 per cent and 2.9 per cent, respectively, from 2.8 per cent and 3.1 per cent.

UOB associate economist Jester Koh and senior foreign exchange strategist Peter Chia noted that the latest monetary policy statement “seemed to imply greater certainty over the baseline trajectory of core disinflation”.

MAS expects core inflation to “step down more discernibly” in the fourth quarter into 2025, noting that global producer prices “have only risen modestly thus far”, even as some shipping rates have gone up.

Global crude oil prices have also fallen from their recent peak in April, while the prices of most food commodities, as well as intermediate and final goods, have been stable.

Domestic unit labour costs should also rise at a “significantly slower rate” this year than in the last two years, as the labour market becomes less tight and productivity picks up.

MAS also noted that the seasonally adjusted quarter-on-quarter rate of core inflation declined to an annualised rate of 2.1 per cent in the second quarter.

It added: “The sequential pace of price change, which better captures the most recent inflation in the economy, is expected to be lower in the second half of 2024 compared to H1.”

Against this, OCBC chief economist Selena Ling said there is a potential opening for a policy easing move at the next two meetings in October and January “if a pre-emptive approach is adopted with greater comfort over the core inflation momentum normalising in 2025”.

As for growth, MAS noted that economic activity among Singapore’s major trading partners has remained “broadly stable” in recent months.

Meanwhile, global final demand should gain in the quarters ahead from the anticipated lowering of interest rates and continuing investments in information technology.

Yet, the pace and timing of monetary policy easing, and the impact of geopolitical and trade conflicts on confidence and production costs, remain uncertainties to growth, it said.

Singapore’s monetary policy settings were last changed in October 2022, when the midpoint of the S$NEER policy band was re-centred higher to the prevailing level then. No change was made to the band’s slope or width.

That was the last of five consecutive tightening moves – two of which were off-cycle adjustments – which began in October 2021.