All eyes are on the Monetary Authority of Singapore’s (MAS) upcoming half-yearly macroeconomic review announcement, which is anticipated on Apr 14.
The policy announcement – which comes amid broadening growth recovery and heightened inflation concerns – is “shaping up to be a highly anticipated one in years,” says BofA Securities’ Asia and Asean economist Faiz Nagutha.
For reference, the MAS has three policy levers – the slope of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER), the midpoint of the band and the bandwidth – which can be altered in its policy decision. It can change one or more of the levers each time.
“The S$NEER slope is usually calibrated to reflect MAS’ assessment of the macroeconomic outlook,” Morgan Stanley’s economists Deyi Tan, Louise Loo and Jin Choi write in a research note.
“Re-centering of the midpoint is typically used to quickly align monetary policy to manage near-term macro pressure. Widening of the policy band is generally done to deal with increased volatility/uncertainty,” they add.
The central bank - which uses a forex-centred monetary policy framework by managing the SGD against a basket of currencies within a policy band – was one of the ‘early hikers’ in Asia, says Bank of Singapore’s currency strategist Sim Moh Siong.
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The central bank had announced a pre-emptive shift to currency appreciation in October 2021 by 50 basis points, and subsequently took it up a notch by another 50 to 100 basis points in January 2022 in an off-cycle move, following higher inflation levels.
The risk of stagflation has been elevated by the ongoing crisis between Russia and Ukraine. Given Singapore’s highly open economy and strong trade links to Europe, the city-state is not immune to the downside growth risks, says Sim.
He observes that the S$NEER had dipped briefly following Russia’s invasion of Ukraine but has since rallied back towards the top of the band, thus “reflecting renewed expectations of a policy tightening by the MAS”.
See also: MAS set to hold monetary policy as inflation persists
Agreeing, Tan, Loo and Choi expect the MAS to steepen the appreciation slope of the S$NEER by around 1.5% to 2% while widening the policy band – just like what was done in October 2010.
The widening of the band would allow for the S$NEER to strengthen in the near-term and vent inflationary pressures, while offering the option for the S$NEER to weaken, should downside growth risks materialise, they explain.
Maybank's Chua Hak Bin and Lee Ju Ye estimate that the S$NEER is trading at around +2% above the implied mid-point, testing the top-side of the upper band.
They expect the MAS to tighten by re-centering the S$NEER band to the prevailing level at the upcoming meeting.
Chua and Lee point out that core inflation has been rising at the fastest pace in nearly a decade, amid rising commodity prices, a tight labour market and demand recovery from the re-opening.
They forecast that core inflation will rise to 2.7% in 2022, from 0.9% in 2021, while headline inflation is expected to hit 3.6% from 2.3% in 2021.
In line with this, Chua and Lee warn that households and businesses will face rising cost pressures. For instance, global food prices climbed by 21% in February to hit a historical high, even before the Russia-Ukraine war had escalated.
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Similarly, wage costs and services inflation are likely to persist given a tight labour market, stricter foreign manpower measures, an expansion of the Progressive Wage Model to the retail sector and the introduction of the minimum local qualifying salary in September.
In this time, private transport costs are believed to remain high because of shrinking Certificate of Entitlement (COE) quotas and rising petrol prices.
Against this backdrop, Chua and Lee say that the “tightening will provide more room near-term for the S$NEER to appreciate and contain imported inflation”. They add that the central bank will likely maintain the current slightly steeper slop, given the worsening growth outlook in the medium term.
Meanwhile, BofA’s Nagutha is expecting a 100 basis point increase in the policy slope from the current 1% per annum to 2%.
“We believe that MAS' priority will be to raise the slope to an appropriate rate as a steeper slope delivers the most durable form of tightening against inflation,” he explains, adding that a stronger change in the slope (100 basis points) is more likely than the 50 basis point adjustments seen in recent years.
Nagutha reckons that the 100 basis point change in the slope alone is likely to be sufficient in addressing inflation concerns.
However, he acknowledges that the central bank may feel the need for an immediate adjustment to the policy band given the shifts in near-term inflation concerns. As such, he says the second-most likely policy position would be a 50 basis point increase in the slope and a 100 basis point below-prevailing re-centering.
The way Nagutha sees it, a “less likely, but out of the box” option would be to widen the band from around +/- 2% to +/-3%, and to be combined with an increase in the slope.
This combination will act as a de-facto re-centering in the near-term, while also delivering durable tightening.
Looking ahead, economists from UOB Group believe that the knee-jerk strength in the SGD after a policy tightening “is likely to be limited considering the current challenging risk backdrop”.
As such, they are maintaining an upward trajectory in the USD/USGD to $1.38 in 2Q2022, $1.39 in 3Q2022 and $1.40 in both 4Q2022 and 1Q2023.
Cover image: file photo
