Photographer: Sam Kang Li/Bloomberg

Singapore Seen Holding Monetary Policy, Saving Tools for ’17

Updated on
  • Economy not in recession ‘but that might change,’ RBS says
  • Bias for Singapore dollar to weaken, Credit Suisse’s Wan says

Singapore’s central bank will probably refrain from easing policy when it meets this week, saving its ammunition for next year as the city-state’s economic outlook deteriorates.

The Monetary Authority of Singapore, which uses the currency rather than interest rates to manage the economy, will maintain its current policy settings, according to 21 of 23 economists surveyed by Bloomberg. The central bank eased twice in 2015 and again at the first of this year’s two scheduled meetings in April, when it shifted to a neutral stance of zero appreciation for the local dollar.

Growth and inflation in the export-oriented nation haven’t slowed enough to justify further action, according to Royal Bank of Scotland Group Plc. The MAS is set to reserve its firepower for next year, when the city is likely to feel more pain from China’s slowdown and the slump in oil prices that has hurt the local marine and offshore industry.

“We’re not in a recession right now, but that might change by early next year given the global outlook,” said Vaninder Singh, a Singapore-based economist at RBS who correctly predicted the MAS’s decisions at the two previous gatherings. “Once the meeting is behind us, once people start positioning for April, that might start to push the Singapore dollar lower.”

The local dollar is set to weaken to S$1.39 versus the greenback by the middle of next year, a level last reached in March, according to the median of analysts’ forecasts. The currency has fallen 2.3 percent since the end of June to S$1.3790 as of 6:38 a.m. London time on Tuesday as traders increase bets the Federal Reserve will raise interest rates. The Singapore dollar tumbled 6.6 percent last year, its biggest decline since the 1997 Asian financial crisis.

The MAS guides the Singapore dollar against a basket of currencies and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band. It refrains from disclosing details of the basket, the band, and the pace of appreciation or depreciation.

Michael Wan at Credit Suisse Group AG, predicts the authority will adjust the center of the band this week, one of only two economists in the survey with that view.

“Even if MAS easing doesn’t come in October, they will eventually have to do so given the structural economic changes and headwinds facing the economy,” he said. “The bias and risk are definitely for the currency to be weaker.”

‘Tough Period’

Singapore’s Deputy Prime Minister Tharman Shanmugaratnam said last month the economy is “in for a tough period, and it will last for a while,” in comments reported by the Business Times. Growth this year will be at the lower end of the government’s forecast of 1 percent to 2 percent, he was quoted as saying.

In an unscheduled statement in January last year, the central bank said it would seek a slower pace of appreciation for the Singapore dollar against its trading basket. It left policy unchanged at the first of its two regular meetings in April last year, before “slightly” reducing the slope of appreciation again at its October gathering. It unexpectedly eased in April, adopting a policy last used during the 2008 global financial crisis, as economic growth in the Asian financial hub ground to a halt.

Inflationary Pressure

Growth probably stagnated in the third quarter, with gross domestic product posting zero expansion on an annualized basis compared with the previous three months, according to the median estimate of 14 economists surveyed by Bloomberg. Compared with a year earlier, it probably slowed to a 1.7 percent increase from 2.1 percent in the second quarter.

The central bank said in July the core inflation measure, which excludes the costs of accommodation and private road transport, will probably keep rising.

“The inflation outlook doesn’t seem to warrant another easing step this week,” said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney. “Rather, the risk of a surprise easing seems more likely to come from a soggy growth outlook.”

A decline in local interest rates, with the three-month Singapore interbank offered rate at the lowest level in more than a year, has “done some of the easing work” for policy makers, said Khoon Goh, head of regional research at Australia & New Zealand Banking Group Ltd. in Singapore. The Singapore dollar is set to weaken to S$1.40 by year-end on expectation of further stimulus in 2017, he said.

“Economic and inflation developments have not deteriorated sufficiently for the MAS to contemplate further easing at this stage,” Goh said. “Maintaining the neutral policy stance and leaving the re-centering option on the table gives the MAS some flexibility.”