MAS likely to maintain monetary policy stance for rest of 2023: economists

SINGAPORE’S central bank is widely expected to stand pat for the rest of the year, following Friday’s (Apr 14) surprise decision to end its hiking cycle after 18 months amid a likely “deeper than anticipated” economic slowdown.

“Growth momentum has slowed significantly while inflation has peaked, and (is) likely to moderate going forward,” said DBS senior economist Irvin Seah. “The changing risk dynamics between growth and inflation has prompted the Monetary Authority of Singapore (MAS) to rebalance its exchange-rate policy.”

Concurring, Maybank economists Chua Hak Bin and Lee Ju Ye said that “concerns of a growth slowdown seem to be outweighing inflation”, despite the elevated core inflation.

In its Monetary Policy Statement (MPS) on Friday morning, MAS said that it will maintain the prevailing rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band.

At 8.04 am, shortly after MAS’ announcement, the USD/SGD exchange rate saw a knee-jerk rally of 0.5 per cent, hitting a high of 1.372 before hovering between 1.323 and 1.326. More than half the analysts polled by Reuters and Bloomberg ahead of the announcement had expected some kind of tightening.

Economists noted a change in the central bank’s tone to a more “dovish” one in the latest half-yearly statement, following five consecutive tightening moves within 12 months.

MAS appears confident that core inflation will cool to 2.5 per cent year on year by end-2023, even if the figure is expected to remain elevated in the coming months. February’s core inflation, which excludes accommodation and private transport, remained at a 14-year high of 5.5 per cent year on year.

The Maybank team said that it is sceptical core inflation will fall so sharply in the second half of 2023, given persistent wage pressures from the tight labour market and expansion of the Progressive Wage Model. MAS, on the other hand, is expecting wage growth to ease, particularly in sectors more exposed to international trade and finance.

The central bank also said that its five successive tightening moves since October 2021 have tempered the momentum of price increases, even if inflation is still elevated. “The effects of MAS’ monetary policy tightening are still working through the economy and should dampen inflation further,” it added.

Imported inflation – which is already negative – should fall further, alongside lower commodity prices and the stronger S$NEER, MAS said. It noted that the current appreciating path of the S$NEER policy band is “sufficiently tight and appropriate for securing medium-term price stability”.

The official outlook remains at 3.5 per cent to 4.5 per cent for core inflation, and 5.5 per cent to 6.5 per cent for headline inflation. MAS added that when the impact of goods and services tax (GST) hike is excluded, core inflation would be even lower and closer to the historical average. 

Economists also pointed to MAS’ gloomier take on the economy, as well as a first reference to downside risks to inflation, having only warned of upside risks previously. A sharper-than-expected downturn in advanced economies could induce a general easing of inflationary pressures, MAS said.

Meanwhile, Singapore’s gross domestic product (GDP) in the first quarter has turned out to be worse than expected, at 0.1 per cent year on year, according to advance estimates. With the economy contracting 0.7 per cent sequentially, some economists said they are now bracing for a technical recession.

MAS’ decision points to “the primacy of changes in forecasts and a gentler trajectory over the elevated level of inflation in policy decisions”, Citi economist Kit Wei Zheng said. “From a risk management perspective, (this) decision also provides more scope for the S$NEER to adjust to a lower level in the event of a large negative shock before the October MPS,” he noted.

Most economists are expecting MAS to pause its tightening cycle at the next policy meeting, due six months from now.

“After this pause, the bar to restart the tightening cycle is much higher,” said Morgan Stanley economists Derrick Kam and Jin Choi. “For tightening to restart, we would need to see fresh upward impetus to the medium-term inflation outlook, or the global economy has to accelerate towards a more steady-state expansion.”

RHB senior economist Barnabas Gan said that the caveat would stem from renewed inflation risks as a result of an unexpected exacerbation of geopolitical tensions and intensified supply-chain congestions. These, he noted, may prompt policymakers to revisit further tightening to ensure price stability.

HSBC economist Yun Liu said that the key question now is when MAS will start to relax its monetary policy stance. “Despite uncertainty on the global economy, our central case is for the MAS to hold until end-2024. Singapore will likely see slower growth this year, but it is not a recession. From now on, the focus point will be high frequency indicators to gauge where growth is going,” she explained.