The Singdollar’s recent strength has raised questions about whether the Monetary Authority of Singapore (MAS) could be hinting at a possible change of policy ahead.
According to an HSBC Global Research report, some onlookers have been left wondering if the central bank will take a risk-based approach — turning hawkish again after a pause on tightening monetary policy — after core inflation in April surprised on the upside by remaining sticky at 5%.
This was largely a result of services inflation re-accelerating, which prevented core inflation from falling to 4.7% as the market had expected.
With the MAS forecasting core inflation to drop to slightly below 4.5% in 2Q2023, some market watchers are now pointing to the central bank’s track record of re-centring several times in 2022 to make up for under-estimating core inflation, says HSBC.
HSBC notes that the Singapore dollar nominal effective exchange rate (S$NEER) has been hovering around 1.3% above the midpoint of its model since June 8, adding that it estimates the S$NEER has “seldom” risen beyond 1.2% above the midpoint since the last re-centring in the MAS’ Monetary Policy Statement (MPS) in October last year.
Still, the bank believes it is “premature” to jump to the conclusion that another re-centring is likely to happen in the next MPS come October. “Yes, the average [core inflation] for the first four months of the year is 5.3%. But the 3.5% to 4.5% forecast range for core inflation this year is not yet out of reach given the base effects ahead as well as considering import price deflation and still falling commodity prices,” says HSBC.
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It adds that the core inflation print for May, to be released on June 23, will be closely followed, and that a print of 4.7% or below will be helpful to keep MAS’s 2Q2023 forecast “viable”.
“In our view, inflation is no longer as urgent a problem for the MAS as in 2022. The cumulative impact of MAS’s past tightening moves is still working its way through the system. Inflation expectations in Singapore have moderated — the current Google search interest on inflation is the lowest since late 2021,” says HSBC.
It notes that MAS’s FX reserves increased by US$13.5 billion ($18.15 billion) in May — as large as the increase seen in March after valuation adjustment, just before the central bank kept its policy settings on hold in mid-April.
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In the MAS June survey of professional forecasters, none of the 26 respondents said that they expect changes to the slope, width and level at which the S$NEER policy band is centred in the upcoming MAS review.
Meanwhile, 26% of respondents anticipate a reduction in the slope of the S$NEER policy band in April 2024 and 5% of respondents expect MAS to lower the level at which the S$NEER policy band is centred.
