Singapore central bank tightens monetary policy

A Singapore 10-dollar note Photo by Leslie Shaffer

The Monetary Authority of Singapore (MAS) effectively tightened monetary policy, saying on Friday that it would slightly increase the slope of the Singapore dollar nominal effective exchange rate (NEER) policy band amid expected economic expansion and projections of rising inflation.

“The width of the policy band and the level at which it is centered will be unchanged,” the MAS said in a statement on Friday. “This measured adjustment follows the slight increase in the slope of the policy band in April 2018 from zero percent previously, and is consistent with a modest and gradual appreciation path of the Singapore dollar NEER policy band that will ensure medium-term price stability.”

The MAS said that its core inflation measure, which excludes the costs of accommodation and private road transport, rose to an average of 1.9 percent on-year in the July-to-August period, up from 1.5 percent in the first half of 2018, amid higher prices in oil-related, food and retail items.

“In the quarters ahead, imported inflation is likely to increase on account of higher global oil and food prices,” the MAS said. “On the domestic front, the improving labor market should underpin a faster pace of wage growth in 2018 and 2019 compared to last year.”

It added that higher import and labor costs could be passed through as domestic demand strengthens, but that the extent of price increases would be limited by greater market competition in several consumer segments, including telecommunications, electricity and retail.

The Singapore economy was expected to expand at a slower, but still steady pace for the rest of 2018 and into next year, the MAS said, with its core inflation measure expected to rise in the near term before stabilizing just below 2 percent. It projected its core inflation measure would be in a range of 1.5 percent to 2 percent in 2018, and average 1.5 percent to 2.5 percent in 2019.

On Friday, preliminary data showed Singapore’s economic growth in the third quarter slowed to 2.6 percent on-year from 4.1 percent in the second quarter.

The MAS said it expected Singapore’s economy to expand in the upper half of its 2.5 percent to 3.5 percent forecast range for this year and then moderate slightly next year.

Capital Economics said that it wasn’t expecting the central bank to tighten policy again over the coming year, pointing to a deteriorating economic outlook, adding it was wary of reading too much into Friday’s gross domestic product (GDP) data, and not only because the preliminary figures are sometimes subject to “very large” revisions.

“With weaker global growth set to weigh on exports and domestic monetary conditions set to tighten further as the U.S. Fed continues to raise interest rates (Singapore’s exchange rate regime forces it to adopt the same policy stance as the U.S.), growth is likely to weaken over the coming quarters,” Capital Economics said in a note on Friday.

It also said it didn’t expect much worry from inflation as the recent spike in core inflation was on electricity tariff hikes; wage growth has started to slow and oil prices were likely to fall, it added.

Nomura, however, said the policy door had been “left open” by the MAS’s benign outlook.

“A further ‘slight’ tightening is possible at the next policy meeting, given the MAS has highlighted a positive output gap and some underlying inflation pressures (though expected to ease below 2 percent over the medium term),” Nomura said. “However, we believe that, if global conditions were to worsen significantly, the MAS could pause or even ease if necessary.”

Instead of interest rates, the MAS uses the Singapore dollar exchange rate to set policy. That’s due to the island nation’s open economy and small size. Monetary policy is set by adjusting the Singapore dollar’s trading band, which is based on a basket of currencies weighted to trade levels with the country, but which is also undisclosed.

The MAS has official policy-setting meetings only twice a year, in October and April, although on rare occasions, it has taken action between meetings.

The dollar/Singapore dollar was at 1.3736 at 10:41 A.M. SGT, down from as high as 1.3767 before Singapore gross domestic product data and the MAS announcement were released, but off the low of 1.3728 after the announcements. The pair had fallen from levels as high as 1.3839 on Thursday as the U.S. dollar weakened.

“From a trade weighted point of view, the MAS decision basically reinforced the relative strength of the Singapore dollar in comparison to
the Asian currencies,” UOB said in a note on Friday. It said it expected 1.37 would be a strong support level for the dollar/Singapore dollar pair, noting that over the past four times the MAS has increased its policy slope since 2010, the pair had traded higher by an average 117 pips in the next 30 days.

DBS said it expected the Singapore dollar’s upside would be limited to around 1.370 against the U.S. dollar as the Singapore dollar NEER is only around 0.2 percent below the estimated ceiling of the trading band.

It said it was sticking with its forecast for the U.S. dollar to keep rising and for the dollar/Singapore dollar pair to rise above 1.40 eventually.


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