MAS unlikely to ease monetary policy in April; economists eye July as possibility

SINGAPORE’S central bank is expected to stand pat at its next monetary policy review, said economists, some of whom believe it may begin easing by July.

The review by the Monetary Authority of Singapore (MAS) is expected to take place this week.

“There is no rush to relax monetary policy at this juncture, given an export-driven economic recovery and still-elevated inflation,” said Maybank economists Chua Hak Bin and Brian Lee.

They noted that MAS likely views the current monetary settings as “appropriate” to guide core inflation, which excludes accommodation and private transport, down to 2 per cent by early next year.

February’s consumer price index (CPI) rebounded unexpectedly, with both headline and core inflation up half a percentage point year on year.

MAS has not tweaked policy settings for a year, since the five consecutive tightening moves made within 12 months starting from October 2021.

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OCBC FX strategist Christopher Wong said the re-acceleration in February’s inflation reflected the effects of Chinese New Year, and was “well within the guidance of policymakers” that core inflation is expected to rise in the current quarter.

“This should dampen market chatter that a potential MAS easing is round the corner,” he said.

Citi economist Kit Wei Zheng said the continued negative output gap into the first half of 2024, cooling labour market and gradually moderating core inflation are reasons why the central bank would keep current policy settings.

Several economists gleaned historical records for clues on how MAS would likely act when it releases its monetary policy statement (MPS) this month. OCBC’s Wong noted that it did not rush into easing after inflation peaked in previous cycles in the 2010s.

He added that MAS maintained its appreciating policy stance for a while, and moved to ease only in an off-cycle meeting in January 2015, when growth conditions worsened and the inflation outlook had shifted significantly.

Meanwhile, UOB economists Alvin Liew and Jester Koh looked at the gap between the year-on-year import-weighted inflation and Singapore’s equilibrium core inflation. They observed that this “inflation gap” was negative during or prior to the month of the decision in six out of eight MAS monetary policy easing episodes from 2007.

“At the current juncture, the inflation gap remains just a tad positive and could fall further in the coming months, which suggests the door to normalisation may open at the upcoming (review),” they said.

However, they added that the probability of this happening is 30 per cent; there is a much higher likelihood of “policy normalisation” in July instead.

DBS Group Research also believes MAS may move in July towards “slightly reducing the slope” of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, when core inflation “resumes its decline with signs of stepping down in Q4”.

“We expect bumpy core inflation to cool, amid fading GST (goods and services tax) hike impact, moderating domestic labour cost pass-through, and contained imported inflation, with 3.1 per cent forecast in 2024,” the team said. GST rose by one percentage point to 9 per cent this year.

OCBC’s Wong said he does not rule out the odds of MAS easing in H2 if “external sources of inflation are deemed to be more benign and core inflation in Singapore eases materially”.

Still, there is a low risk of MAS steepening the slope in H2, Citi’s Kit said, especially if there are more concrete signs that the output gap closes or turns positive, which could cause core inflation to overshoot the expected 2 per cent forecast by 2025.