The Monetary Authority of Singapore (MAS) is likely to keep its current policy unchanged at its monetary policy meeting on Oct 13, say analysts. The MAS had tightened its monetary policy five consecutive times since October 2021 before leaving its parameters unchanged in April.
‘Too soon’ for MAS to ease forex policy: BoS
“MAS is unlikely to lead the region amid growing debate over which of the Asian (excluding China) central banks will be the first to ease monetary policy,” says Bank of Singapore’s (BoS) currency strategist, Sim Moh Siong.
Though Singapore’s inflation numbers are declining, Sim adds that it may be too soon for the central bank to ease its foreign exchange (forex) policy just yet.
“We expect official communications to avoid encouraging perception of dovishness. The MAS is likely to stress ‘getting the job done’ when it comes to bringing inflation back under control to around the historical average of slightly below 2%,” he writes.
“It is too soon to ease forex policy as core inflation has moderated more slowly than the MAS had expected,” he adds. “The recent rally in oil and rice prices, a still-tight labour market, administered price hikes like the increase in public transport fares and a 2024 Goods and Services Tax (GST) hike also makes it tough to be relaxed that the disinflation trend will stay intact.”
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While Sim has been more accurate in his reading of MAS’s policy calls, he acknowledges that he was wrong in his expectations of the Singapore dollar (SGD) gradually strengthening against the US dollar (USD) over the course of this year.
However, the depreciation of the SGD was more reflective of a strong USD instead of a weak SGD.
The Singapore dollar nominal effective exchange rate (S$NEER), which remained resilient despite a weaker SGD to date, is also likely to remain resilient, says Sim.
See also: MAS set to hold monetary policy as inflation persists
“Of the top five currencies that likely dominate the SGD basket (i.e. USD, Chinese yuan (CNY), Euro, the Malaysian ringgit (RM) and Japanese yen or JPY), the SGD is flat to slightly weaker against the Euro so far this year but has appreciated against CNY, ringgit and JPY,” he notes.
As such, he has revised his three-month (which is equivalent to the year-end estimate) USD/SGD forecast to 1.37 to reflect a “neutral view”.
“[We] see the pair at 1.35 and 1.33 in six and 12-months’ time (previous three, six, 12- month forecasts were 1.35, 1.33 and 1.31). Some reversal of USD strength in 2024 on softer US growth that blunts the Fed’s hawkish bias is possible. But we may need to wait a bit longer before that is clear,” adds Sim.
MAS to keep all three parameters of S$NEER unchanged: DBS
DBS Group Research’s economist Chua Han Teng, senior forex strategist Philip Wee and senior rates strategist Eugene Leow foresee the MAS to keep the mid-point, slope and width of the S$NEER policy band unchanged in October.
“The progressive appreciation of the policy band from October 2021 to October 2022 is working to lower inflation. The MAS would continue to balance between being vigilant on upside inflation risks and soft growth,” writes the DBS team, noting that there is “some way to go” before headline and core inflation returns to the pre-pandemic run-rate.
“Yet, Singapore’s overall import price decline pace has bottomed out, even though it is still falling in y-o-y terms. A strong SGD is still needed to contain imported inflation and upside risks,” the team notes.
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Looking ahead, the team sees disinflation as unlikely, with inflation being above the pre-Covid-19 average.
“We see another GST hike, and overall wage growth is supported by policies to uplift lower wage workers,” says the team.
“Tighter financial conditions from higher interest rates have pressured financial services and loans. With business expectations still positive, we could see some stabilisation, as major global central banks pause rate hikes,” it adds.
“Short-term SGD rates have been stable over the past few months. Even if the Fed hikes once more, we think that the passthrough to SGD rates would be muted.
In forex, the team sees the USD/SGD ending 2023 higher at 1.38 instead of 1.36 due to a firmer USD globally. “We lifted the 2023 growth outlook for the US economy and lowered Singapore’s previously.”
“Short-term SGD rates have been stable over the past few months. Even if the Fed hikes once more, we think that the passthrough to SGD rates would be muted,” it adds. “10Y SGS yields are getting dragged up as the market gravitates towards high-for-longer in the US. However, we expect Singapore government securities (SGSs) to hold up better than US Treasuries (USTs).”
Finally, the outlook for growth in the global economy remains “highly uncertain” with global leading economic indicators staying “sluggish” across the US, Europe and China, notes the DBS team.
MAS likely to maintain status quo but with material risk of slight slope reduction: UOB
The MAS is likely to call for no changes to the slope of the S$NEER, say UOB’s senior economist Alvin Liew, associate economist Jester Koh and senior forex strategist Peter Chia. The UOB team has ascribed a 60% possibility to the scenario.
The team also sees the likelihood (40%) of MAS reducing the slope of the S$NEER band by 50 basis points (bps).
“[This is likely to happen] should MAS place more weight on the weakening external outlook (implying a more negative than expected output gap) and/or completely exclude the effects of GST in assessing the inflation trajectory, implying that the average core inflation level is effectively closer to the 2% handle in 2024,” writes the UOB team.
Globally, the team is expecting the US Federal Reserve to hike rates “one final time” by 25 bps at the Federal Open Market Committee (FOMC) in November. It is expecting the US Fed to also hold the projected terminal Federal Funds Target Rate (FFTR) level at 5.50% to 5.75% for the rest of the 2023 with the first cut pencilled in mid-2024.
Meanwhile, the European Central Bank (ECB) is likely to keep its policy rates at its current levels for the rest of the year. The ECB has raised its policy rates ten times since July 2022 to decade highs of 4.50%.
“Real interest rates (nominal policy rates deflated by y-o-y headline consumer price index or CPI) have turned positive for the US and may soon turn positive in the Eurozone, keeping monetary policy settings restrictive which could weigh on economic activity in the advanced economies in the coming quarters,” the team observes.
In China, the team expects China’s GDP to grow by 5.0% in 2023 and 4.5% in 2024.
“[We] expect the People’s Bank of China (PBOC) to cut the one-year loan prime rate (LPR) by another 10 bps and the five-year LPR by 20 bps by end 2023. In addition, the second 25 bps cut to the banks’ reserve requirement ratio (RRR) this year has been duly delivered as we had forecast,” says the team.
Baseline to maintain but cannot rule out slight easing: Maybank
Maybank Securities analysts Chua Hak Bin and Brian Lee see the MAS maintaining the prevailing S$NEER rate of appreciation as it is expected to remain focused on inflation.
However, they are not ruling out the possibility of a “slight” easing with the MAS reducing the slope of the appreciation bias amid stagnating growth, easing inflation and Singapore’s 3Q2023 GDP growth forecasted only at +0.1%.
“We would ascribe a 20% probability to the MAS surprising with a ‘slight’ easing move. We expect no change to the width or centre of the band,” say Chua and Lee.
“The S$NEER is trading at around +1.7% above the implied mid-point, or the upper half of the band by our estimates. We expect three-month Singapore overnight rate average (SORA) to peak at 3.8% by year-end (versus current 3.7%) and decline to 3.2% by [the] end [of] 2024, predicated on 100 bps of Fed rate cuts in the second half of 2024,” they add. “Tightening monetary conditions and rising interest rates are dampening loan demand. System-wide loans (-6% in August) has been contracting since November 2022, led by business loans.”
Tightening should not be discounted though unlikely: RHB
RHB Bank Singapore senior economist Barnabas Gan, like his peers, see the MAS as unlikely to change its policy parameters in its upcoming October policy meeting.
“We see three reasons why the MAS will keep its policy parameters unchanged in October: resilient GDP growth momentum to persist into 2024, slowdown in inflation pressures, albeit some short-term of sticky prices in 4Q2023 and ample room for the S$NEER to move in tandem with future economic pressures,” he writes. At the time of writing on Oct 4, Gan estimates that the S$NEER is at 1.1% above the mid-point. “The current gradient and width are projected at +1.5% and +/- 2.0%, respectively.”
However, the prospect of a tightening cannot be discounted although it is “very unlikely” to happen.
“Inflation pressures are heating up given the uptick in global food and oil prices. Singapore remains a small and open economy, thus suggesting that any further exacerbation in commodity price upticks will quickly elevate inflation pressures,” Gan points out.
“We keep to our forecasts for the US FOMC to raise its Fed Fund Rates to 5.5% - 5.75% in 4Q2023, with the balance of risks tilted to 5.75% - 6.0% in 1Q2024. The concern should policy be tightened in October is that Singapore’s growth dynamics remain clouded by external winds, and any unforeseen wild cards could inject downside surprises to its growth prognosis,” he adds.
Overall, Gan has kept his GDP growth estimates at 1.5% for 2023. “[We] perceive a rosier economic prognosis for GDP growth to accelerate to 3.0% in 2024. Headline CPI is expected at 4.6%, as mentioned, but should decline to 3.0% in 2024, assuming that commodity prices will normalise into 2H2024.”
50 bps slope steepening still a possibility: Citi
Citi Research analyst Kit Wei Zheng sees a 75% chance that the MAS maintaining its current policy. “[This is] on a continued negative output gap into 2024, decelerating core inflation momentum and continued tightening via the current 1.5% per annum (p.a.) slope, alongside [a] lagged pass through of earlier tightening,” says Kit.
“But there remains a non-negligible risk (25% probability) of a 50 bps slope steepening to 2% p.a , as core inflation has moderated more slowly than MAS had expected in April, while risks to inflation are gradually shifting to the upside amidst higher oil prices and structurally tight labour market,” he adds. “Indeed, various metrics suggest tighter policy band parameters remain an option, and there may be room to ‘steer the S$NEER’ higher within an unchanged band as a form of de-facto tightening.”
In 2H2023, Kit expects Singapore’s GDP to improve due to its manufacturing and tourism sectors.
“We see some downside risks to our 3Q2023 GDP growth forecast of 1.3% q-o-q seasonally adjusted (SA), which implies average 2Q2023-3Q2023 growth of [around] 0.7%, weaker than growth rates in the two quarters that historically preceded past tightening episodes,” he says.
“Compared to April, downside risks to MAS’s 2023 growth forecasts have not broadly changed. Still, external demand uncertainties will likely persist (or even intensify) into 2024 amidst a delayed US slowdown/recession, and uncertainties in China,” he adds. “Continued negative output gap in 2024 would for the most part not be consistent with further tightening. That said, MAS did tighten in 2022 despite expecting the output gap to turn negative in 2023, though this was also the intended outcome of policy and with inflation at higher levels.”
No rush to loosen: HSBC
There is no rush for the MAS to loosen its policy, says the team at HSBC Global Research. “Amid growth challenges, the MAS will likely send some dovish signals in its statement, paving the way for possible monetary loosening next April. That said, we expect the tone to be only slightly dovish.”
To this end, economist Yun Liu, head of Asia forex research Joey Chew, head of Asia Pacific rates strategy Pin Ru Tan and associate Madhurima Nag expect the MAS to keep its monetary policy settings unchanged in October given the sticky core inflation.
“While there is little need to tighten further, the MAS is well aware of the negative consequences of premature reversal of monetary tightening. After all, elevated and sticky core remains the priority of the MAS, trumping concerns relating to sharply slowing growth,” the team writes.
“Coupled with recent rallies in the global oil and rice markets, a still-tight labour market, a near-term upward fare adjustment in public transport and the remaining 1 percentage point (ppt) GST hike continue to pose notable upside risks to inflation,” it adds.
At this point, it may also be premature to sell the S$NEER index.
“Although there is 2% - 3% of downside in the index (which is currently around 1% above the midpoint in our model), there is roughly 1% of annualised carry to consider. Alternatively, one can consider using select SGD crosses to express a bearish SGD view,” says the team.
“For example, USD/SGD has the highest correlation to the strengthening DXY (or US Dollar Index) index in Asian forex. Also, since the SGD REER (or real effective exchange rate) is overvalued, SGD crosses that have risen the most during the past two years, such as SGD-JPY and SGD-TWD (Taiwan dollar), may be more vulnerable to correction,” it adds.
