Singapore’s dovish policy outlook in focus

Central bank expected to keep policy settings unchanged

SINGAPORE: With Singapore’s central bank widely expected to keep policy settings unchanged today amid an economic recovery and strong fiscal support, the city-state’s longer-term outlook will be parsed for signs of future tightening.

The Monetary Authority of Singapore (MAS), which uses the currency as its main policy tool rather than interest rates, probably will refrain from changing any of the three currency band settings, according to all 16 economists surveyed by Bloomberg.

If that’s the case, focus will shift to what the MAS statement foreshadows for its next decision, due in October.

Market participants will be sensitive to any hint of whether tightening could be in order, particularly in light of global debates around inflation.

The MAS guides the local dollar against a basket of currencies and adjusts the pace of appreciation or depreciation by changing the slope, width and centre of a currency band.

It doesn’t disclose details of the basket, the band or the pace of appreciation or depreciation.

Singapore’s currency, which strengthened against the US dollar through most of the pandemic last year, has slipped about 1.4% against the greenback since the start of 2021.

An unchanged stance would mean the MAS is satisfied with the current path of the currency.

Here’s a look at what’s expected in the central bank’s statement, which is due to be released today:Forward guidance

The MAS left its settings unchanged when it met last October, signaling a neutral policy and saying an accommodative stance “will remain appropriate for some time.”

That followed a meeting in March 2020, weeks ahead of its traditional schedule, at which officials took the unprecedented step of simultaneously lowering the midpoint of the currency band and reducing the slope to zero, easing policy.

Despite the likelihood that settings will remain unchanged Wednesday, six of the 16 analysts in the Bloomberg survey predicted the MAS will strike a more hawkish tone in its statement.

Looking ahead to next October’s decision, just two respondents in the survey currently see MAS tightening policy then, with two more saying it’s a significant possibility that can’t be ruled out.

Recovery trajectory

First-quarter advance estimates of gross domestic product (GDP) growth, also released today, will lend more clarity as to whether Singapore’s rebound is on track.

The government expects GDP to expand 4% to 6% in 2021 after the economy contracted 5.4% last year, its worst showing since independence in 1965. Analysts see the city-state bouncing back to 6% growth this year.

“Recovery is gaining momentum as global economic conditions continue to improve, ” Irvin Seah, an economist at DBS Bank Ltd, said in a report March 30, when he revised his growth estimate to 6.3% from 5.5%.

“The Covid situation in Singapore remains almost entirely under check.”

The MAS has tried to ensure sufficient liquidity in the financial system and shore up consumer borrowers during the pandemic, though it has largely left the heavy lifting to the fiscal side.

The government has pledged some S$100bil (US$75bil or RM307bil)) in stimulus since the start of the crisis.

Policy makers remain focused on ramping up a vaccination drive that lags some advanced-economy peers, though barely any local virus cases are reported daily and many restrictions have been lifted. Negotiations are ongoing to open up travel bubbles with

several countries.

Inflation outlook

The central bank will offer an update to its inflation estimates for the year. In its latest projection on March 23, the MAS saw its preferred core inflation measure landing between 0% and 1% this year.

The MAS also noted that its estimate of all-items consumer price inflation was under review given “recent sharper-than-expected” cost increases for non-core items.

That gave a nod to the global jump in commodity prices and a louder debate on whether central bankers globally could start to fall behind inflation, especially in the wake of last month’s US$1.9 trillion US stimulus package.

Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte Ltd, said there’s around a 40% probability that the MAS re-centres the policy band “to blunt the inflation overshooting risk.”

No other survey respondent flagged a significant probability of a change to one of the three policy settings. — Bloomberg

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