SURPRISINGLY weak industrial production figures have strengthened economists' expectations that the Monetary Authority of Singapore (MAS) will loosen policy in its upcoming half-yearly policy review, due no later than Oct 14.
Most economists now expect the slope of the Singapore dollar nominal effective exchange rate (S$NEER) to be lowered, in a turnaround from the consensus view just three months ago that MAS would stay its hand.
But this is expected to be a "slight" reduction - widely understood as 50 basis points (bps) - rather than a return to a zero slope. The S$NEER slope is assumed to be 1 per cent currently, meaning it would take two "slight" 50bps reductions to take it down to neutral. Economists also expect no change in the width or centre of the policy band.
In April 2018, the MAS ended two years of neutral policy with the first monetary tightening in six years, and tightened further that October. This April, it held steady, maintaining the Singapore dollar's rate of appreciation on a "modest and gradual appreciation path".
But economic figures have since been dismal, with second quarter gross domestic product growth nearly flat at 0.1 per cent, and the official growth forecast being cut to between zero and 1 per cent for 2019.
Said OCBC Bank currency economist Terence Wu: "Since the April monetary policy statement, the domestic growth and inflation outcomes have softened steadily, underlying the 'slightly below potential' prognosis."
But he added: "While the risk of a more dovish move to a zero rate of appreciation cannot be fully discounted, we think this drastic step may not be warranted for now.
"Taking this step would imply an official economic prognosis that is considerably worse than our expectation, or expected to deteriorate rapidly from here."
August's industrial production contracted 8 per cent year on year, far worse than consensus predictions of a 0.6 per cent fall. In the wake of the figures released Sept 26, Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye noted that "hopes for a manufacturing recovery are evaporating".
But they too maintain their full-year growth forecast at 0.6 per cent and expect only a "slight" reduction in the S$NEER slope.
Similarly, Citi analysts Kit Wei Zheng and Ang Kai Wei said the weak industrial production figures suggest renewed risk of a technical recession in the third quarter, but believe this could be avoided if the September figures show a sequential rebound.
They too stick to an expectation of a 50 bps slope reduction, assigning that a 70 per cent probability.
More aggressive slope flattening is "unlikely" at a 15 per cent probability, they said, citing factors such as an acceleration in unit labour cost, core inflation slightly above 1 per cent, and a relatively small negative output gap.
" Should current and financial account inflows continue to keep the Singapore dollar resilient, MAS has the option to 'steer the NEER' lower to match the step-down in GDP forecasts, via a mix of communications, forex intervention or liquidity tools," they added.
"Especially with IP (industrial production) plummeting", the risks are tilted towards a greater reduction, Barclays economist Brian Tan acknowledged - though maintaining his 50bps forecast. In an earlier note, he and Barclays forex analysts had said: "With the outlook for US-China trade negotiations and Brexit shrouded in uncertainty, we believe the MAS will want to preserve the option to reduce the slope further in April if downside risks materialise. "
UOB economist Barnabas Gan similarly kept his 50bps call but sees "a growing risk that MAS may ease the policy slope all the way to neutral, a signal that a looser monetary policy is needed to cushion both inflation and growth risks into 2020".
Following the latest industrial production figures, UOB lowered its full-year GDP growth forecast to 0.3 per cent from 0.6 per cent previously.
One dissenting voice is that of Robert Carnell, chief economist and head of research for Asia-Pacific at ING, who expects the MAS to flatten the S$NEER slope completely in October, saying: "Given how long this policy has been in place while the economy has languished, there is an argument for any policy adjustment to err on the aggressive side."
"It will be another six months before the MAS is due to make a further adjustment, so underdoing it now will only condemn the economy to a longer period of inappropriately tight policy and slow growth," he added.