Singapore's Central Bank Seen Holding Fire as Growth Recovers

  • Economy bounced back in 4Q from contraction as exports rise
  • Low inflation, growth risks support neutral policy views

A currency exchange kiosk in Singapore.

Photographer: Sam Kang Li/Bloomberg

Singapore’s recovery from a contraction last year may give the central bank little incentive to adjust its policy stance next month as it monitors the impact of higher U.S. interest rates.

The Monetary Authority of Singapore, which uses the currency rather than interest rates as its main policy tool, will keep its stance unchanged at its next bi-annual meeting around mid-April, according to 15 of the 16 economists surveyed by Bloomberg. The MAS shifted to a neutral stance of zero appreciation for the local dollar last year.

Central banks in Asia are contending with the risk of capital outflows and weaker currencies as the U.S. gradually raises interest rates. In Singapore, policy makers can take comfort in a stronger growth outlook with economists in a separate central bank survey forecasting growth of 2.3 percent this year from 2 percent in 2016.

“Inflationary pressures are not really building up that much, so MAS doesn’t need to tighten yet,” Masashi Murata, a currency strategist at Brown Brothers Harriman, said by phone from Tokyo. “At the same time, economic growth looks fine, you have the U.S., China, U.K., the euro zone, all improving, which means that Singapore’s economy is going to improve. That’s why MAS doesn’t need to ease more.”

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.

The central bank is forecasting inflation will average 0.5 percent to 1.5 percent this year, after almost two years of declining prices. It sees gross domestic product expanding 1 percent to 3 percent this year, partly driven by a pickup of semiconductor exports tied to China’s supply chain. Domestic demand is still weak though, with unemployment hitting a six-year high in the fourth quarter.

The dependence on China’s economic cycle may be Singapore’s weak spot, said Vaninder Singh, a Singapore-based economist at Natwest Markets, a unit of Royal Bank of Scotland Group Plc. Singh is the only economist surveyed who is forecasting the MAS will ease policy in April by re-centering the currency band lower.

“I’ve had an easing call for a while basically based of the underlying economy,” Singh said by phone. “If you look at private consumption, the economy is growing only from manufacturing, this is coming from China. At this stage, China is doing well, but we have a number of headwinds. China may be going for a soft landing, but a soft landing in China may still have a significant impact on Singapore.”

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